Is The Internal Revenue Service (IRS) Being Underfunded?

The Internal Revenue Service Building.

In the conversation around wealth inequality in the United States, the Internal Revenue Service (IRS) plays a critical but often overlooked role, especially concerning policymakers and budgeting officials. The IRS is tasked with enforcing tax laws, collecting federal revenue, and ensuring everyone, wealthy or poor, pays the amount they’re supposed to according to the tax code. But is the IRS equipped to do its job well enough to be fair? Many economists, policymakers, and other organizations argue that it is not able to because of the many loopholes and problems with our current tax system. The growing understanding is that the IRS has not had enough money for years, weakening its ability to track and tax the nation’s wealthiest individuals but still, in the meantime, making the majority of the middle and lower classes pay every single cent.

The Current Foundation of the IRS

According to data cited in popular economist William Gale’s book “Fiscal Therapy,” the U.S. government lost an estimated $535 billion in unpaid taxes in 2017 alone. A large part of that came from underreporting of income and underpayment of taxes, especially among higher-income households who have access to teams of tax advisors and lawyers. This problem isn’t just about tax avoidance; it’s also very much about enforcement. With the amount of resources and budget the IRS currently has, the IRS simply cannot exactly audit all high-wealth individuals and measure complex financial structures at the scale necessary to ensure tax compliance.

The Peter G. Peterson Foundation has also pointed out that the IRS already has problems enforcing existing tax laws, making it one of the critical reasons for why policies like wealth taxes are being disregarded. The challenge goes beyond just tracking income. For wealthy individuals, much of their financial power lies in assets—stocks, bonds, real estate, art, and private businesses, whose values fluctuate and are harder to assess. As a result, the IRS would need highly trained specialists and better technology to fairly and consistently evaluate these assets, but current funding levels don't allow for that.

Why Funding Matters

The core issue is not just whether the IRS is doing enough. Rather, it’s whether it even can with its budget. Over the past decade, the IRS budget has been cut by billions of dollars, even though the U.S. economy and financial systems have grown more complex and gotten more developed. The number of IRS employees has declined as well, and audit rates for the wealthy have dropped significantly. In fact, low-income Americans claiming the Earned Income Tax Credit are now more likely to be audited than millionaires, not because they cheat more, but because they’re easier to audit.

This imbalance contributes directly to wealth inequality. High-net-worth individuals can take advantage of sophisticated tax strategies, including legal loopholes like the “borrowing loophole,” which allows them to take out loans backed by their assets (instead of selling them to get money), effectively enabling them to avoid capital gains and income taxes. Meanwhile, everyday Americans with wages or salaries have their taxes withheld from every paycheck, with far fewer opportunities for lowering their tax burdens.

Public Support and Political Stalemates

There is growing public and political support for improving tax enforcement. Proposals to increase IRS funding have been included in recent federal budgets and legislative packages, but they often become political flashpoints. Some opponents fear increased funding would lead to overreach or burdens on small businesses, while others argue that better enforcement could generate hundreds of billions of dollars in extra revenue without raising tax rates at all.

In February 2024, researchers at Equitable Growth estimated that closing the billionaire “borrowing loophole” alone could raise around $100 billion over ten years. But even identifying and taxing that income requires a well-funded and capable IRS.

The Bigger Picture

The debate over IRS funding is not just about tax collection; it’s about economic fairness for everyone and strengthening the ability of the government to enforce its laws. When the IRS lacks the resources to audit billionaires but can still scrutinize low-income workers, it sends a message that the system favors those who already have the most.

Underfunding the IRS doesn’t just mean fewer audits. It means less transparency, less accountability, and ultimately, a tax system that loses the trust of the public. If wealth inequality is truly a concern for policymakers, then rebuilding the IRS’s capacity to enforce laws and regulations fairly and effectively is not just an option; it is a necessity.