Perm links to the IRS DA.

While a tax expenditure can have the same effect on the allocation of resources and the distribution of income as a corresponding tax increase, there are always some differences between tax and spending programs. The most obvious is the one discussed in the previous section—the difference in how tax and direct expenditures are displayed in budgetary accounts and communicated to the public. But there are some other differences as well. A second (and also obvious) difference is that tax expenditures always require some level of involvement by the IRS, while direct expenditures do not. Tax expenditures affect the total amount of tax paid or refund due on April 15 and can affect withholding schedules and estimated payments. Individuals claim benefits, subject to audit by the IRS, but may in some circumstances also be required to submit documentation supplied by other agencies. A third difference is that the costs of administering direct expenditures are more transparent than the costs of administering tax expenditures because they are typically revealed in the budgets of program agencies. In contrast, there is no specific accounting for the administrative costs of tax expenditures. Tax expenditures do raise the cost of providing a given level of enforcement and taxpayer service, but the IRS budget does not display incremental costs attributable to specific provisions.7 A fourth difference is the time period used for determining and paying benefits. The income tax uses an annual accounting period as the basis for calculating and assessing tax liability, although tax payments are made more frequently through withholding and estimated taxes. In contrast, spending programs do not necessarily use a one year time period to determine the amount of benefit payments a person or family receive and may pay benefits on a monthly or quarterly basis instead of annually. Eligibility for benefit programs may be based on the stock of assets, on income flows within a year, or on income or earnings over multiple years. For example, Social Security retirement benefits are determined by a formula based on average indexed monthly earnings over 35 years. The use of an annual accounting period places some limitations on how tax incentives can be designed.