Making the Internal Revenue Service Work

Abstract

This is an Article about how to redesign the federal tax system so that the Internal Revenue Service (IRS) can administer it more effectively given that Congress is only willing to let the IRS have around 82,000 employees and a $12 billion budget. As the IRS Oversight Board and the National Taxpayer Advocate have frequently emphasized, the United States underinvests in the IRS. Underinvesting means that taxpayer services are suffering and that tax enforcement has been significantly weakened.

With budget deficits for “as far as the eye can see” and the recent IRS troubles with tax-exempt political organizations, the prospects for increased funding for the IRS are remote. In this Article, we consider a variety of approaches that would make it easier for the IRS to raise and collect revenue, and we offer a number of recommendations for legislative and administrative changes. For example, we recommend simplifying the tax system, enhancing third-party reporting, and streamlining the tax-filing and dispute-resolution procedures.

In short, this Article discusses how the tax system should be designed so that it can work with a modestly-funded tax administrator. Part II of this Article provides an overview of the federal tax system, and Part III of this Article provides an overview of tax administration. Part IV of this Article discusses the key problems with current tax administration. Finally, Part V of this Article offers a number of recommendations for change, including some that would require legislation and some that could be achieved administratively.

Keywords: tax policy, tax administration

JEL Classification: H24, H25, H26