By Charles Dervarics
It’s hard to think of a policy idea with less public enthusiasm than giving the Internal Revenue Service more money to beef up tax enforcement. Like telling your kids to eat their vegetables or take out the trash, it’s a plea more likely to produce the dreaded stink eye than a hearty endorsement.
But maybe such conventional wisdom is wrong.
The issue of IRS tax enforcement was a flashpoint in President Biden’s plan for more federal spending. Advocates say it could help pay for a $1.2 trillion infrastructure plan and other new spending by cracking down on wealthy Americans who don’t pay what they consider to be a fair share of their income in taxes, although bi-partisan negotiators ultimately cut a proposal to use better tax enforcement from the infrastructure bill making its way through the Senate before the August recess.
The idea behind better enforcement is not to conduct more audits but to help close the “tax gap,” or the amount of federal taxes owed but not paid. For most Americans, it’s easy for the government to track their income because they receive W-2 forms every year. But many of the nation’s wealthiest earn their incomes through other means not routinely collected by the IRS.
In a recent investigation, ProPublica found that the 25 wealthiest Americans paid only 3.4% of their income in taxes over a five-year period. By comparison, the average American paid a much higher rate—14%--of their income in taxes. The current IRS Commissioner, Chuck Rettig, says the government is not collecting about $1 trillion of federal taxes owed each year.
To address the problem, the administration would fund technology upgrades and give the IRS access to more income information. Biden also would increase staffing to reverse recent declines that occurred despite greater complexity in the U.S. tax code. The White House has said the provisions could yield at least $700 billion in new revenue over the next decade, enough to pay for several new government initiatives.
But the plan has met strong opposition from congressional Republicans who favor smaller government and have a deep distrust of the collection agency. For critics such as Grover Norquist, Americans for Tax Reform president, the IRS is often a political agency that undermines conservative groups. During the Obama administration, the agency acknowledged it targeted groups for extra scrutiny if they used words such as “tea party” and “patriot,” and an acting IRS chief resigned as a result.
“It’s wrong at every level,” Norquist said of the new IRS plan.
Although Republicans have beaten back attempts to add IRS provisions to the infrastructure bill, many Democrats are still looking to insert the plan into one of its new spending initiatives. Democrats also got a boost recently when three former IRS senior leaders–all serving Republican presidents—spoke out in favor of Biden’s plan.
In a Politico column, Charles Rossotti (Clinton and G.W. Bush administrations), Fred Forman (G.W. Bush administration) and Fred Goldberg (G.H.W. Bush administration) all endorsed the idea of more scrutiny for the richest taxpayers.
“The IRS expansion was based on a smart idea, which could also be good politics and serve the interests of both parties: Not more audits, but better technology and income tracking to catch wealthy cheaters,” the former leaders wrote.
They said one critical element of Biden’s plan is that banks and other financial institutions would have to report total inflows and total outflows from certain accounts, giving the IRS more information via 1099 forms on the earnings of wealthy Americans. This move, they noted, “will help taxpayers file more accurate returns and will enable the IRS to better determine where to look for scofflaws.” More IRS funding also may improve services for ordinary taxpayers, the three argued.
For now on this topic, however, the ball remains on Congress’ court with no signs of bipartisan consensus on Capitol Hill anytime soon.