Lawmakers debate the merits of increased IRS funding to improve compliance and up revenue

June 10, 2021

Lawmakers in a joint congressional hearing on Thursday took opposing positions when debating President Joe Biden’s budget proposal to shrink the Tax Gap, which is the difference between taxes that are owed and the amount that is collected.

The president wants to provide the IRS with $80 billion to improve tax compliance. The increase in revenue would be used to hire over 80,000 new agents and raise $700 billion over the next ten years. Included in this strategy would be increased information reporting and regulating tax preparers.

Democrats support this effort.

“Over the past decade, the IRS has been starved of resources to go after a significant contributor to the tax gap – wealthy taxpayers, who can use sophisticated methods to evade taxes and whose income is not subject to reporting requirements,” said Rep. Mike Thompson (D-Calif.), chairman of the House Ways and Means Select Revenue Measures Subcommittee, which co-hosted the hearing with the Committee’s Oversight Subcommittee.

Committee Member Don Beyer (D-Va.) said that 70% of the Tax Gap stems from the top 1% of taxpayers, which he described at “traitors.”

Republicans, on the other hand, fretted that giving the IRS increased oversight powers might provide the agency with an opportunity to infringe upon taxpayers’ rights.

“I’m hearing serious concerns from ag producers and small business owners that spend a lot of time and money on their taxes that the IRS would be focusing a lot more time and resources coming after them,” said Rep. Adrian Smith (R-Neb.), Ranking Member on the Committee’s Select Revenue Measures Subcommittee.

Republicans also raised the recent ProPublica report on leaked IRS data, which detailed the tax returns of wealthier taxpayers. They expressed concern if more leaks would occur if the tax agency was given a broader reach into taxpayers’ information.

“I worry about what steps could be taken,” said Rep. Mike Kelly (R-Penn.), the Ranking Member on the Oversight Subcommittee.

Kelly mentioned the IRS controversy involving Lois Lerner, who in 2013 was a central figure in the tax agency auditing political groups to keep them from participating in the 2012 elections.

“I would suggest that this [IRS abusing its power] is not the first time that this has happened,” Kelly said.  

Appropriations for the IRS have fallen by about 20% (adjusted for inflation) since FY 2010. The decline in funding has resulted in a 15% drop in the number of full-time employees at the agency, which has hurt enforcement, according to Douglas O’Donnell, the IRS Deputy Commissioner for Services and Enforcement, who testified during today’s hearing.

“The effect of personnel lost is most visible in enforcement activities. Among the 33,378 full-time personnel lost between FY 2010 and FY 2020, more than 13,388 were enforcement personnel. These losses included revenue agents and revenue officers who audit tax returns and perform collection activities, as well as special agents who investigate tax-related crimes and other issues,” O’Donnell said.

The Tax Gap is estimated to be about $441 billion for the 2011-2013 time period. Assuming the Gap grows with the overall economy, the estimated gross Tax Gap would be about $580 billion for 2019, according to Mark Mazur, Treasury’s Acting Assistant Secretary of Tax Policy, who also testified at today’s hearing.

“Over the coming decade, the gross Tax Gap is projected to total approximately $7 trillion, roughly 15.2% of all owed taxes,” he said.

O’Donnell contended that regulating paid tax preparers would help shrink the Tax Gap.

“Returns that are prepared by a paid preparer are more likely to have errors than individuals who prepare their own,” O’Donnell said. “Anything we can do to improve our ability to ensure that paid preparers have the confidence and the capacity to prepare an accurate return and avoid further interaction with the Internal Revenue Service is a major step forward.”

Providing funds so the IRS can increase compliance efforts was originally a part of the president’s American Families Plan. Last week, Biden included it in his American Jobs Plan (aka, infrastructure proposal) that he hopes Congress will approve soon.  Improving compliance would raise $778 billion over ten years, according to the Treasury Department. The legislative fate of the American Jobs Plan is currently unclear. It is also uncertain if lawmakers will include increased IRS funding in the legislation.

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