A reduction in IRS employees has a direct impact on taxpayer filings and may result in billions in lost revenue, according to research compiled by two UConn accounting professors and a UConn Ph.D. recipient.

Professor Vishal Baloria presented the findings in June to hundreds of IRS employees and researchers at the 16th Annual IRS/TPC Joint Research Conference on Tax Administration in Washington, DC. He produced the research with Professor Todd Kravet and Jennifer Luchs-Nunez ’22 Ph.D., now a professor at Colorado State University.

“This is a timely topic with IRS staffing cuts taking place, and it was well-received by the audience,’’ Kravet says. “We’re all taxpayers and can appreciate how important it is to collect what is owed. A smaller tax collection, or reduced enforcement results in the nation borrowing more money or increasing individual tax burdens on those who do pay.’’

Some States Experienced up to 3.2% Decrease in Filings

The IRS went from 46,000 to 40,000 full-time positions from 2008 to 2014. The primary focus of the UConn research was an 11% IRS workforce reduction that followed a hiring freeze in 2010. The UConn researchers culled their information from publicly available data.

The researchers compared tax-filing data from states, like Connecticut, that have a mandatory state-income tax versus states that do not. Their belief is that taxpayers from those states that mandate an income-tax are more impacted by IRS staff reductions, because taxpayers with a double-filing burden require more resources. They also may have a greater incentive for non-compliance and a greater burden by having to file two returns. The study found that those states saw an incremental 3.2% decrease in filings.

Of note, the decline was concentrated mostly among higher- and middle- income earners. Lower-income filers showed little change, presumably because they still had access to free tax-assistance services in the community run by non-IRS employees.

Inaccurate Tax Filings in Non-Wage Income Could Total More than $33 Billion  

Baloria says he believes there are two main culprits behind the drop in filings.

“First, the IRS enforces tax law, so if agents are laid off, the average person sees the probability of being audited as less,’’ he says. “It’s like if you don’t see a state trooper along I-84, maybe you’ll take the chance and go 70 miles per hour. Our research suggests that IRS staff play a vital role in maintaining tax compliance.’’

Secondly, the decreased access to the government agency that offers help with questions, whether by phone or at a taxpayer assistance center, may lead to some people just giving up on filing.

“Most people who aren’t accountants don’t understand the complexity of filing taxes,’’ he says.

The impact of non-compliance is substantial. The U.S. Government could lose billions of dollars a year from people who don’t pay or who underreport their total income. Although wage statements are difficult to alter, the researchers believe that non-wage income, such as stock sales, reselling concert tickets, or revenue from a side business, are much easier to manipulate.

IRS staffing reductions are linked to a 7.8% decrease in reported non-wage income, which could lead to a $33.8 billion annual tax revenue loss at the national level.

“Our results from the 2010 staffing cuts imply that, on average, for an individual taxpayer we see underreporting of more than $1,000 in nonwage income, meaning $267 per filer in lost income for our government,’’ Kravet says.

The research is particularly robust, the professors say, because they were able to cross-reference another IRS staff reduction in 1995 and found similar results. They also found comparable outcomes when IRS enforcement and assistance decreased during the COVID-19 lockdown. As a falsification test, they found no change around a different federal government agency staffing cut at the SEC in 2007 that should not affect tax compliance.

“Although this research is of national importance, it is particularly relevant in Connecticut because we are a state that is impacted because our state income taxes are designed to piggyback with the national income tax system,’’ Kravet says.

Findings Triggered a Second Study for the Team

The three researchers have also produced a second research study finding evidence about the importance of geographic proximity to state tax agencies. That work is pending publication in the National Tax Journal.

As a result of that work, Baloria was asked to serve on a policy panel at the National Tax Associating Spring Symposium this past May at Georgetown University. Baloria was also asked by Governors Safeguarding Democracy, an alliance of state governors, to present the findings this August to state representatives interested in this emerging issue.