"Penny wise, pound foolish." This old phrase clearly harkens back to Britain, with its reference to a pound rather than a dollar. But the meaning is clear enough in an American context: some decisions may save money in the short term but cost much more in the long term.
A case in point is tax audits by the IRS. Congress has cut the IRS budget in recent years, leaving the agency with fewer employees and less capacity to conduct tax audits. In this post, we will update you on that story.
As we noted in our July 16 post last year, the IRS budget went down by nearly $2 billion dollars from 2010 to 2014. This led to the loss of more than 10,000 jobs, including 5,000 jobs in the enforcement division.
Not surprisingly, the number of audits has also declined. It went from 1.4 million in 2013 to 1.2 million last year. This year, the number is expected to decline again, to about 1 million audits.
IRS Commissioner John Koskinen said last month that the reduction in audits is not an invitation for taxpayers to start cheating. After all, the IRS is hardly giving up on enforcing tax law. Moreover, the audits that the agency does conduct will probably take longer to resolve -- precisely because of the decrease in staffing that has resulted in fewer audits.
But the penny-wise / pound-foolish phenomenon cannot be denied. Fewer audits will mean less tax revenue collected, in an amount far greater than the money Congress has saved by cutting the IRS budget.
In fact, Commissioner Koskinen has already tried to quantify just how much revenue will be lost due to uncollected taxes from fewer audits. According to the commissioner, $6 to $8 billion has already gone uncollected since 2010 as a result of decreased audits due to staff cutbacks.
That's a chunk of change!
Source: CNN Money, "IRS will do fewer tax audits this year," Jan. 16, 2015