The Biden administration and Democrats have a key message to corporate America and the wealthy: It's time to pay up in full. Officials have raised tax enforcement as a priority in recent months as the administration seeks to fund its priorities.
The Internal Revenue Service has seen a dramatic decrease in funding and staff in recent years and its commissioner suggests the United States is missing out on collecting as much as $1 trillion a year.
The service estimates $441 billion in taxes owed went unpaid each year from 2011 to 2013. Through enforcement, officials collected $60 billion of those unpaid taxes, reducing the gap to $381 billion annually. On Tuesday, Commissioner Charles Rettig told senators that figure did not include cryptocurrency as well as much information on foreign source incomes and illegal source incomes.
"Wealthy tax cheats have proven that with enough attack-dog lawyering, they can litigate the IRS into submission and rip off working taxpayers for big money," said Senate Finance Committee Chair Ron Wyden in Tuesday's hearing. "Meanwhile, the burden of tax audits was shifted unfairly to working people. That's because it's a lot cheaper and easier to hassle a working mom over a tax credit over repayment than it is to decipher the latest money laundering schemes."
Rettig said Tuesday the IRS is "outgunned."
According to a Congressional Budget Office report, increasing IRS funding for examinations and collections by $20 billion over 10 years would increase revenues by $61 billion — reducing the deficit by $41 billion. A $40 billion increase would boost revenue collections by $103 billion. A separate Treasury report claimed every dollar put into IRS enforcement would yield a 6-to-1 return on investment.
As part of its so-called "skinny budget" released Friday, the White House requested $13.2 billion for the Internal Revenue Service for next year, a $1.2 billion, or 10.4%, increase. The funding would in part allow the IRS to increase oversight of wealthy and corporate tax returns, according to the administration. It also called for an additional $417 million for tax enforcement as part of a multiyear tax initiative. All together, the Treasury Department said the budget request will increase resources for tax enforcement by $0.9 billion.
"The president's funding request makes things fairer," Treasury Secretary Janet Yellen said in a statement. "It injects capital into communities where capital is usually hard to come by. It will make paying taxes a more seamless process for millions of Americans. And it makes sure that corporations actually pay what they owe."
Enforcement also plays a role in the administration's infrastructure plan. While the president's proposal to pay for the $2 trillion American Jobs Plan relies heavily on changes to corporate tax rate and international taxation, the White House did include a provision in its Made in America Tax plan about ramping up corporate tax enforcement as well.
That all comes as the IRS enforcement budget has fallen by 25% over the past decade, making it difficult to hold wealthy taxpayers and corporations accountable. A decade ago, nearly all large corporations were audited by the agency annually, but now the number of large corporations being audited by the IRS has also fallen to less than 50%, leaving the agency to prioritize less complex cases over investigations into large corporations and their wealthy owners.
Wealthy individuals who own stakes in large corporations have been audited at lower rates over the last decade than the lowest-income individuals. Those taxpayers eligible for the Earned Income Tax Credit — those with low to moderate incomes — have seen audit rates fall at the same rate as corporations with more than $20 billion in assets.
Rettig said Tuesday, the agency has 17,000 fewer enforcement officers than it did 10 years ago. He estimated last month that with $1 billion, the agency would bring on about 4,875 personnel. He also said the agency needs to modernize its systems and increase information reporting to address tax evasion.
An estimated 36% of unpaid federal income taxes are owed by the top 1%, a group of academic and IRS researchers recently found, and if collected, that would increase federal revenues by about $175 billion a year. The report last month found the IRS random audits can completely miss tax evasion by the wealthiest Americans and such audits do not capture more sophisticated tax evasion through offshore accounts or pass-through business, which are used at the wealthiest taxpayers.
The report suggested while low audit rates are not ideal, standard audits can be limited in their ability to detect some forms of evasion by wealthy taxpayers and additional tools should also be needed to fight high income evasion.