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What is the return on investment in an additional IRS agent?

March 11, 2011

The Freakonomics blog approvingly cites the power-grabbing IRS Commissioner, Doug Shulman:

Now, the IRS may be doing even fewer audits, thanks to political efforts to cut the agency’s budget. In fact, "IRS Commissioner Doug Shulman told the committee Tuesday that the $600 million cut in this year’s budget would result in the IRS collecting $4 billion less through tax enforcement programs."

Does the IRS really get $6.66 back for every dollar spent on new agents? Obviously the IRS would get approximately zero revenue if it had no agents, but at some point you reach diminishing returns by hiring IRS agents. The government clearly couldn't get rid of a 1.4 trillion budget deficit by increasing the IRS budget by $210 billion, even if it wanted to.

Not all IRS spending is equally effective. For example, the massive displacement of IRS resources required by Commissioner Shulmans efforts to assert control over tax preparation will not raise any revenue, other than the fees charged to pay Accenture to give us all new identification numbers.

Most of the recent IRS exams I've seen lately have been poorly chosen. They have audited widows, elderly couples on Title 19, and corporations recently audited with no changes. They have asserted wacky penalties with no basis against compliant taxpayers participating in their so-called offshore "amnesty," in a program that seems to be off the rails.

Perhaps the IRS budget cuts are a hint to the Commissioner to spend IRS resources more carefully. Maybe they could put more effort into chasing actual tax cheats, rather than bothering widows and regulating law-abiding preparers.

Tags: Freakonomics.preparer regulation.Shulman.