Years of budget cuts shrink the IRS, and corporations are the big winners

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The IRS is leaner, but not meaner.

Several years of budget cuts have limited the reach of the tax man. The result is a smaller IRS, and one that is diminished in many ways. The agency audits less — large corporations have been especially spared — and its appetite for imposing fines or seizing assets has also declined, according to a CNBC analysis of IRS data.

Less enforcement means the agency has missed out on potential tax revenues.

"There's a direct dollar impact," said Mark Mazur, vice president of tax policy at the Tax Policy Center. He said the IRS collects an estimated $4 for each dollar spent on enforcement.

Defenders of the budget cuts implemented by congressional Republicans argue that the agency's shortfalls are primarily due to mismanagement.

"There's a need for more accountable and responsible leadership," said David Burton, a senior fellow of economic policy at the Heritage Foundation, a conservative think tank. Burton argues that the agency has too few political appointees for administrations to effect change and that Congress should have more discretion to provide oversight.

By at least one measure, the IRS is more efficient in its use of resources. Over the past several years, the cost of collecting tax revenues has fallen significantly.

Here are five charts that show how spending cuts have changed the IRS.

The IRS has a smaller budget and fewer workers

Spending within the agency has declined by $533 million and its staff has dropped 14 percent since 2012.

Experts warn that this trend will make it more difficult to retain the agency's institutional knowledge. "Once you start reducing the work and hollowing out the workforce, you can't turn that around overnight," said Mark W. Everson, former IRS commissioner and vice chairman of Alliantgroup.

Everson notes that the agency is often unable to afford top talent in high-paying fields like information technology. But those workers are needed to build the infrastructure to prevent system failures such as the one that occurred this year on Tax Day when the IRS site crashed thanks to its 60-year-old IT system, he says.

Your tax return is less likely to be audited

The loss of money and people has corresponded with a drop in audits. For most filers, this rate wasn't high to begin with. Individuals and small corporation returns were examined only around 1 percent of the time at their peak in 2011.

But in that same period, the examination rate of large corporations fell drastically, from close to 1 in 5 to less than 1 in 10.

Given a shrinking budget, you might expect the IRS to exclusively investigate big taxpayers. Everson says that's not an option. Having a presence among people and companies across the economy promotes overall compliance, he argues. The idea is that when one taxpayer is audited, they'll tell others who then feel pressured to file honestly.

"It's why you need a presence of some sort in all areas," Everson says.

Some delinquents get a pass

For those who attempt to dodge taxes, the odds of being caught have declined. The number of new investigations into delinquent taxpayers fell by 85 percent from 2012 to 2017. The total number of enforcement actions like levies, liens and seizures has similarly plummeted.

Will lax enforcement decrease the tax base? Maybe someday.

"Enforcement dollars come with a lag," says the Tax Policy Center's Mazur. It can take years for the IRS to close investigations, so the impact on tax revenues can take a long time to materialize, he explains.

Enforcement makes up a smaller share of revenue

The money that the IRS collects by going after suspected tax evaders is a small portion of overall tax revenues. And it has become even less significant in recent years despite a slight rebound in 2016 and 2017.

Still, net collections from enforcement came to $40 billion last year. But that's only about 10 percent of the potential. The tax gap, or the amount of taxes that go unpaid each year, is estimated at around $406 billion.

Former commissioner Everson says the psychological effect that IRS activity has on taxpayers is more important than these revenues. Currently, around 83 percent of Americans willingly pay taxes, according to IRS estimates.

"If you think there's a cop on the beat, you tend to be more compliant," Mazur says.

Despite cuts, the IRS has become more efficient

While most of the numbers point to a beaten down IRS, there is at least one measure by which the agency has improved in recent years. The cost of collecting money from taxpayers has fallen 29 percent since 2012.

One reason is simple math. A smaller budget means costs are down, and an expanding economy has helped to increase overall tax revenues. So the IRS has taken in more revenue while spending less.

Everson also credits efficiency gains to technology, which allows the IRS to more easily spot out-of-whack line items and other red flags, then automatically generate a response.

The IRS' health is tied to Republicans' tax legacy

For years, congressional Republicans have punished the agency over a 2013 scandal involving the alleged targeting of conservative tax-exempt organizations. Budget cuts and calls for criminal charges against IRS officials followed.

But recent events suggest a shift in tone. President Donald Trump's DOJ announced last year that it wouldn't pursue charges against those officials, and the IRS saw a rebound in funding this year that included $320 million to implement the new tax law.

Everson, who was commissioner under President George W. Bush and later ran as a Republican candidate in the 2016 election, says the party understands the challenges the IRS will face as it enforces their signature legislative achievement, the Tax Cuts and Jobs Act.

"They clearly need to fund the agency correctly, including the infrastructure IT needs," Everson says.

Everson likens the task of overseeing the tax overhaul to the deployment of the Obama administration's Affordable Care Act. When health care exchanges went live and didn't function properly, detractors used the failure to their political advantage.

The Heritage Foundation's Burton also sees challenges for the agency as it looks to enforce the new law, particularly as it addresses new complexities related to pass-through entities and the overseas earnings of multinational companies.

As the recent fiasco involving an 11-hour system crash on Tax Day shows, the agency may not be equipped to implement the new law smoothly.

Following the system failure, there was further evidence of a change in tune. A bill aimed at modernizing the agency's decades-old infrastructure passed the House in April with almost unanimous support from both parties.