Tax Policy Fellow
The Internal Revenue Service (IRS) funding bill before the House Appropriations Committee this week doesn’t just add to years of deep cuts that have undermined tax enforcement and harmed customer service. It also cuts funding in half for programs that help low-income and elderly taxpayers file their taxes, while blocking the IRS from limiting a particular type of estate tax avoidance by the country’s wealthiest families.
These proposals would make it harder and costlier for millions of low- and moderate-income workers and elderly people to file their taxes accurately, while enabling very wealthy families to avoid paying billions of dollars in estate taxes. The annual estate tax revenue loss could easily be 100 times bigger than the savings from cutting tax filing services.
Cutting tax preparation assistance. The House bill would cut funding in half for the IRS’s Volunteer Income Tax Assistance (VITA) and tax counseling for the elderly (TCE) programs, reducing VITA from $15 million to $7.5 million and TCE from $8.9 million to $4.5 million. VITA provides free tax preparation for low- and moderate-income people, and TCE provides free tax assistance for people age 60 or older.
The IRS uses VITA and TCE funding for grants to local organizations that coordinate trained volunteers to complete tax returns. In this way, the programs leverage their modest resources to help millions of people: for example, VITA helped more than 3 million clients receive more than $4 billion in federal tax refunds in 2015. Cutting VITA and TCE funding by half would significantly reduce their ability to serve their clients, likely forcing many filers to turn to paid tax preparers. These services can be costly — simple tax preparation services average $159 to $273 depending on how complex the returns are — so low-income and elderly people would end up with much smaller net refunds.
Cutting VITA and TCE funding would also likely increase tax preparation errors for returns that claim the Earned Income Tax Credit, as many VITA and TCE filers do. VITA and TCE volunteers have the lowest error rates of any group of preparers, including attorneys, CPAs, and national tax preparation firms, likely because they must undergo rigorous certification training and pass an annual competency exam. By contrast, about 60 percent of return preparers have no oversight or education requirements, and paid preparers have much higher error rates.
Blocking regulation on estate tax avoidance. At the same time, the House bill would block the IRS from using any resources to finalize, implement, or enforce an August 2016 regulation that addresses a significant loophole in the estate tax. Because of the tax’s generous exemption level — $5.5 million per person (effectively $11 million per couple) in 2017 — only the wealthiest two 2 of every 1,000 estates owe any estate tax. Also, many wealthy families employ teams of lawyers and accountants to develop and exploit estate-tax loopholes that allow them to pass on large portions of their estates tax-free. One such maneuver involves using so-called “valuation discounts” to artificially reduce the value of assets for tax purposes, lowering the amount of estate tax owed even though the underlying value of the assets doesn’t change.
The IRS regulation significantly limits this tax avoidance maneuver, eventually saving billions of dollars in revenues. (There’s no official estimate of the savings, but a similar proposal in President Obama’s 2013 budget would have saved $18 billion over ten years.) The House bill would reopen this loophole, allowing wealthy families to once again exploit it to reduce their estate taxes.