Senator urges Crack Down on Wealthy Individuals and Corporations to Shrink Tax Gap

May 11, 2021

Sen. Sheldon Whitehouse (D-RI) on Tuesday called on increased IRS funding to clamp down on wealthy and corporate taxpayers that he claimed are the main drivers of the Tax Gap, which is the difference between the amount of taxes that are owed and what is collected.

“I would like to explore mandatory funding for the IRS so the agency has sustained and predictable support,” he said during a Senate Finance Subcommittee on Taxation and IRS Oversight hearing, which Whitehouse chaired.

“Cutting the IRS budget gives a tax cut to tax cheats,” he added.

During the hearing, Whitehouse noted that as IRS budgets have declined over the past decade, audits on wealthy taxpayers and international corporations have plummeted.

“Millionaire and billionaire audits dropped over 72%. And audits of the largest corporations, those with over $20 billion in assets, declined by half,” Whitehouse said.  

The Senator went on to say that audits on lower income taxpayers have increased since IRS budgets have decreased.

“As the IRS budgets fell, audit rates for the rich and poor in America converged; a worker receiving the Earned Income Tax Credit (EITC) is nearly as likely as getting audited as a seven-figure earner,” Whitehouse said.

Senator Steve Daines (R-Mont.), who sits on the Senate Finance Committee, questioned Whithouse’s statement, saying that audit rates for wealthier taxpayers is 8% while those receiving the EITC is 1.2%.

Barry Johnson, the Acting Chief Officer of Research and Analytics at the IRS, who testified before the Subcommittee, supported Daines analysis.

“The audit rate is lower as a percentage of all taxpayers in that category than the audit rate for higher income taxpayers,” Johnson said.

Johnson highlighted that the largest contributor to the Tax Gap is underreporting of business income by individual taxpayers, such as income of sole proprietors and those earning rental, royalty, partnership, and S Corporation income. They account for $110 billion of the total $441 billion Tax Gap, which was calculated in 2011 and 2013. Increased reporting would shrink this gap.

“The IRS believes that the lack of reliable and comprehensive reporting and withholding for business income received by individuals is the main reason for these findings,” Johnson said.

Charles Rossotti, who was IRS Commissioner from 1997 to 2002, also said increased reporting would shrink the Tax Gap.

“Tax compliance is heavily driven by whether a taxpayer’s income is reported by third parties in a manner that the information can be efficiently used by the IRS. Where income is reported and easily checked from forms such W-2’s and 1099’s, compliance is 95 to 99%,” he said.

The current compliance rate is roughly 82%, according to Johnson.

“Over the years, our studies have consistently suggested that overall tax compliance is holding steady in the 82 percent to 84 percent range,” he told the Senate Subcommittee.

Still, increased reporting will not close the Tax Gap entirely, according to Rossotti. He estimated that only 19% of what is outstanding will be collected.

The Senate Finance Subcommittee hearing comes as President Joe Biden has proposed providing $80 billion to the IRS to shrink the Tax Gap by $700 billion over the next ten years. The proposal is part of Biden’s Families Plan.

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