'Such nonsense’: Former IRS commissioner rebuffs claims about armed tax agents

Yahoo Finance Video
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Charles O. Rossotti, former IRS commissioner, joins Yahoo Finance Live to explain the new IRS funding bill and distinguishes fact from fiction about its key components.

Video Transcript

[AUDIO LOGO]

- The IRS is speaking out on recent criticism. It's getting the $80 billion in new funding it received as part of the Inflation Reduction Act. IRS commissioner Chuck Rettig published an op-ed this morning on Yahoo Finance, debunking lingering misperceptions about how this money is going to be used. Here to discuss, we've got former IRS Commissioner Charles Rossotti. Charles, thanks so much for taking the time here with us this morning.

CHARLES ROSSOTTI: Glad to be here. Thank you.

- Certainly. First and foremost, when we think about this funding and how it's going to be put to use, it was the clarification that was provided about where the new hires would be, what they would be doing as well as part of the operations. We do understand that the IRS has been incredibly behind in even processing some tax returns. How much might this be able to bring them up to speed on that front?

CHARLES ROSSOTTI: OK, so I think that's a good place to start because before you can talk about what needs to be done, you've got to talk about where they are now. And I went back and looked at the time when I was commissioner starting in 1997, so let's say 25 years ago. And the IRS's total budget today is less than half, half in relation to the size of the economy. That was back then 25 years ago.

And in the meantime, the Congress has passed all manner of laws that it assigns the IRS to administer, ranging from a part of the healthcare system, major thing, all the pandemic relief, even tracking down terrorists after 9/11. All of that has been added while the budget has been cut in half. So you have a depleted agency.

What I think this money will do is partially restore the agency over a 10-year period to where it was, provided it uses the money to be more efficient as well. And I think the top priority actually, the first priority that's going to be done the quickest is to just get service back because the IRS, as you probably know, deals with every family and every business in America, most of it's routine. But people sometimes in that complicated system need to egg a question answered, get an error corrected. And right now that's a really, really sad situation.

I mean, the IRS is answering probably maybe 10% of the phone calls that it gets, and the backlog is huge. And the technology is out of date compared to what you get in your average bank account. So these are the first priorities, and then the longer term, of course, is to cut into some of that unpaid taxes that is mostly on the upper income brackets.

JULIE HYMAN: As you are probably aware, sir, a lot of those Republican lawmakers and those on the right were raising the specter of armed agents, storming people's homes, right? This letter from these lawmakers said that the agency had 5 million rounds of ammunition and almost 4,500 guns, and they were coming for your money. I mean, how do you react to something like that which sometimes has a powerful image for people and is obviously just absolutely false?

CHARLES ROSSOTTI: I would smile and laugh if it weren't so serious, such nonsense, honestly. Let's be clear. The IRS back to the days when they got Al Capone during prohibition, they have had a small portion of their agency about 2%, 2 and 1/2% who do criminal investigations of drug dealers. In today's world, a lot of it is tracking money trail for terrorist gangs and things like that. And so yes, those agents are trained to carry weapons. That's about 2 and 1/2%. It has absolutely nothing to do with the average taxpayer.

So that's just a very unfortunate kind of allegation that just doesn't hold up any water. The average person never even sees an IRS agent. And by the way, there was a poll I just saw that gave me a little bit of encouragement because what it said, they polled the average taxpayer, and 77% of taxpayers, including 77% of Republicans, said they weren't worried at all about IRS agents coming after them. And they're right because that's not going to be what's going to happen at all. So I'm glad you're doing this show because it's just very unfortunate that people would make those kind of-- they're just wild, wild, crazy claims.

- You mentioned that the funding would also go towards ensuring that they can crack down on some of the evasion from the highest levels of earners in those tax brackets. Does this mean that billionaires are on the table and, kind of, really the ones going to be under the microscope here?

CHARLES ROSSOTTI: Well, I'd say upper income people that have-- not all upper income people, but just those that have very opaque sources of income that's not reported, otherwise. That's where the biggest part of the tax gap, the unpaid taxes are. And Janet Yellen put out a letter that made it clear that nobody under $400,000 income was going to see their audit rates increase.

But I mean, look, it's only practical. Let me give you a statistic. If the IRS audits a person that has $400,000 of income and they only report half of it, which is for certain categories fairly typical or accurate as compared with a $50,000 person reports that, they're going to collect 23 times as much from the $400,000 person, so much more. And so it only makes sense what Janet Yellen said is what you would want to do just from a practical standpoint, never mind fairness as well, I mean, that's where the money is.

And it's not all upper income people. It's not like, oh, if I make a big salary on Wall Street, I'm going to get audited. No. I mean, if you make a big salary in Wall Street, you're going to get-- your employer is going to report it as your chart shows on the left there, and it's all reported anyway. It's only if you have some sort of income that is not reported, which is some businesses. And, of course, all businesses, most of them are accurate too. But some are not. And that's where the lost money is, and it adds up to a lot.

And some people have said, well, they're going to turn over every rock. I'm just giving those statistics why that doesn't make sense. It's the upper income that has the money. And the Treasury's estimate, even after all this is done and all the hiring, they're still only going to collect about 5% of the missing income. So hardly, it's a lot of money because it's a big number, but it's hardly turning over every rock. It's just not the case at all.

JULIE HYMAN: Wow, 5% is definitely not turning over every rock. That's still a very low number. Thank you--

CHARLES ROSSOTTI: Well, if you got $7 billion that you're losing and you collect 5%, it's still a lot of money.

JULIE HYMAN: Yes.

CHARLES ROSSOTTI: But it's not turning over every rock. I mean, you're a financial program. Everybody can understand that.

JULIE HYMAN: Yes, most definitely. And it's definitely worth it even to get that amount of money for sure. Thank you so much. This is really helpful for a lot of folks. Former Tax Commissioner Charles O. Rossotti, thank you so much for joining us. Appreciate it.