It would be another smack to the already-battered 2012 tax filing season. | REUTERS Sequestration taxes IRS fraud fight

Law-abiding taxpayers could shoulder the brunt of the blow when the sequester hits the IRS next Friday — in the form of delayed refunds and long waits for telephone help.

But one group might get a break from the sequester: tax cheats.


That's because the sequester is likely to mean fewer agents on the case, which also means fewer eyes on returns that might be trying to duck the law.

( PHOTOS: What they’re saying about sequestration)

It’s a little-discussed risk of the automatic budget cuts — and yet another smack to the already battered 2012 tax filing season.

Absent a last-minute deal, the 8.2 percent funding cut facing the cash-strapped IRS would likely translate to fewer tax specialists on hand to help taxpayers with their returns and root out tax fraud — two tasks that watchdog groups say need more, not fewer, hands.

To be sure, the IRS could find other ways to make up the budget cuts, but all indications from senior IRS and Treasury officials are that the agency would be down a significant number of people.

And while the sequester isn’t great for any federal agency, it amounts to particularly bad timing for the IRS. That’s because, depending on union negotiations, furloughs could come just as millions of Americans are trying to pay their income taxes.

“At a minimum, it’s probably going to take longer for people to get through on the phone; it’s going to take longer for refunds to be processed,” said Floyd Williams, a senior tax counsel at Public Strategies Washington.

Williams, who worked for the IRS for nearly two decades and directed the agency’s legislative affairs office for 16 years, says the sequester could also be a boon to those who purposely commit fraud, or accidentally fill out returns incorrectly.

“Anytime there is a drop-off in enforcement, you’re going to see a growth in the so-called tax gap, which is the difference between what the government collects and what is rightfully owed,” he told POLITICO.

Right now, that gap is close to $400 billion.

Of course, this tax season has already been a topsy-turvy one. Last-minute tax tweaks in the fiscal cliff forced the agency to postpone the tax season start date and push back some types of returns, and a court decision in mid-January left tax preparers scratching their heads over return preparation rules.

In that vein, the cuts — a self-inflicted punishment crafted by the White House and Congress in hopes of spurring deficit reduction as part of the 2011 debt ceiling deal — are just another loop-de-loop on the 2012 filing season rollercoaster.

The IRS did not respond to requests for comment.

But Acting Treasury Secretary Neal Wolin and acting IRS Commissioner Steven Miller have warned lawmakers and staff that the sequester cuts could mean IRS employee furloughs.

Wolin last week told lawmakers in a letter that sequester cuts to the IRS would be “particularly painful … reducing the agency’s ability to provide quality service to taxpayers.”

The IRS has already shaved its 91,000-person workforce by 10,000 employees via attrition over the past two years. Like many agencies, it’s been operating on a reduced budget.

The Taxpayer Advocate Service, an office that strives to make the IRS more user-friendly, told Congress earlier this year that the agency needs more resources to be helpful to Americans.

Now, the IRS is on the verge of operating with even less.

Sequester furloughs would equate to fewer operators or reduced hours at IRS taxpayer calls centers, experts say.

Consequently, millions of Americans phoning for help with their returns might not get calls back.

Last year, more than 115 million people called the IRS for help; only 68 percent of those who wanted to speak with tax experts actually got through — and only after holding for an average of 17 minutes on phone lines.

One million of the 10 million written inquiries mailed to the IRS last year also did not get a response.

Sequester furloughs during tax season will exacerbate that backlog, officials and experts have warned.

“If you need any help during the filing process, you're going to have a much harder time after March 1,” wrote Mark Steber, the chief tax officer at Jackson Hewitt Tax Service, in an op-ed on Huffington Post last week.

His advice: file now before sequester hits.

David Kendall, a fiscal policy expert at the centrist Democratic think tank Third Way, says sequester cuts will also slow tax returns since there will be fewer employees to help with processing.

“Your refund checks are going to come later,” he warned, and vice versa, taxes owed to Uncle Sam will take longer to make their way into the Treasury, he added.

Another fear expressed by IRS officials and tax experts alike: Tax cheats will have a better chance of getting away with their crimes, since the enforcement arm of the IRS will also be slashed.

“IRS would be forced to complete fewer tax return reviews and would experience a reduced capacity to detect and prevent fraud,” Treasury’s Wolin wrote in his letter.

Almost everyone agrees that’s bad news — not only for the IRS, but also for the deficit. IRS officials are quick to tell anyone who wants to slash their budget that every $1 spent on IRS enforcement brings in $4 for the government.

PSW’s Williams says people might even take advantage of the slack in enforcement, making the problem worse.

“If I think I’ve got a one in 1,000 chance of being audited, I might tend to be a little more sloppy in my record keeping … and might take some chances that are maybe pushing the envelope,” he said.

In 2011, the IRS collected $55.2 billion from tax law violators with just under 22,000 tax revenue officers, Kendall told POLITICO.

But sequestration could mean furloughing about 1,800 of those policeman positions, he says, which could cost the IRS $4.5 billion in tax revenue.

This problem also eventually shifts to the taxpayer, he argues.

“With less revenue, deficits would rise as would taxpayer-financed interest on the debt,” he wrote in a report last year. “Specifically, that would mean each U.S. household would have to finance $33 to cover what tax cheats would not pay.”

National Treasury Employees Union President Colleen Kelley, who represents more than 75,000 IRS employees, is already preparing for furlough negotiations — though the IRS as of Friday had not given her union official notice for such plans.

But Kelley points to two factors that could potentially salvage or lessen the sequester’s effects on tax season.

For one, employees have been promised 30 days’ notice before furloughs kick in. That means that the earliest furlough, should the IRS give notice this week, will come at the end of March — the tail end of tax season.

Kelley says employees can also bargain with officials to try to delay their furlough days until later in the year. At the IRS, that means employees might be able to serve their time later in the year, post-filing season.

IRS’s Miller has assured employees he will first try to find savings in travel, training, contracts and grants before freezing work — though Williams says there might not be enough fat to cut in some of those areas.

“In my experience, and I left in June … they really made a lot of the cuts already, and I’m not sure how much more they can sustain,” he said.

Even Kelley at the union says it will be “a pretty steep climb” to keep furloughs off the table completely.

And therein lies trouble for the taxpayer.

“Filing your income taxes is a broad experience across the country and not a pleasant one for most people,” Kendall said. Sequestration, he says, is “just going to make a bad experience even worse.”

This article first appeared on POLITICO Pro at 4:09 p.m. on February 22, 2013.