Natasha Sarin is an associate professor at Yale Law School and the Yale School of Management. For the first two years of the Biden administration, she was deputy assistant secretary for economic policy and a counselor to Treasury Secretary Janet L. Yellen. Lawrence H. Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010.
The current moment is perhaps the most important for U.S. tax administration since the income tax was put in place more than a century ago.
Consider just the past six months: Congress has passed the largest-ever increase in IRS funding; repeal of that funding has become the first legislative priority of the new Republican House majority; and the IRS has been tasked with implementing major novel tax provisions to address the climate crisis. Now, the agency faces an imminent leadership transition.
We both have been engaged with issues like these as government practitioners and as analysts of tax administration (Sarin until recently as Treasury’s counselor for tax policy and implementation, Summers previously as deputy treasury secretary and treasury secretary, and in joint research). For those weighing the future of the IRS budget and those who would shape the agency in the years ahead, we offer five observations.
First, even after the $80 billion investment in 2022’s Inflation Reduction Act, the IRS is in much greater danger of being under- rather than over-resourced.
The IRS has the oldest IT system in the federal government — so much so that systems are written in COBOL and paper returns continue to be transcribed by hand. Each year, more than 260 million returns are filed, and the IRS serves every American household; in comparison, JPMorgan serves about half that but annually spends 28 times more on modernizing its already state-of-the-art technology. It is no surprise, then, that millions of returns filed during the pandemic still have not been processed.
Further, today the IRS has fewer field agents to do complex tax examinations than at any time since World War II. As a result, audit rates for millionaires went down by more than 70 percent over a decade. Providing the IRS resources was a vital first step toward improving the agency, but the task at hand is large.
Second, recent information has strengthened the case that the payoff for investment in tax collection is enormous.
In past work, we have shown that an investment in the IRS similar in size to that of the Inflation Reduction Act would generate more than $1 trillion in additional tax revenue over a decade by reducing the “tax gap” — the difference between owed and paid taxes. But this is, in fact, conservative, as recent research has emphasized a point left out of our calculation: Successful audit activity raises future collections from taxpayers who face enforcement activity. If their home office deduction is disallowed once, taxpayers do not attempt the same deduction again.
Third, improvements in tax administration promote fairness.
Reasonable people can disagree about how progressive the tax code should be. But we cannot see any logical argument for rules that operate differently for certain taxpayers. Most Americans have most of their tax liability automatically withheld and earn income in ways that are reported directly to the IRS — for example, interest income on the 1099-INT or dividend income on the 1099-DIV. But the most privileged Americans accrue income in opaque ways that are not subject to this type of reporting and, therefore, are a source of a large percentage of the tax gap.
A crucial priority for the IRS must be enhancing its capacity to ensure that the most financially sophisticated taxpayers meet their obligations. This would require making much greater use of data science, drawing to a greater extent on those with past experience representing these taxpayers and relying more on outside experts to help evaluate taxpayers’ claims.
Fourth, recent revelations from Donald Trump’s taxes underscore the inadequacy and inequity of current IRS capacity.
Obvious flags went unheeded in the former president’s taxes. Generally speaking, forgiven debt is treated as income because if a taxpayer no longer has to pay a creditor $1 million, he is $1 million richer. In his returns, Trump asserted otherwise, a position his own lawyers did not believe was likely to prevail in the face of an IRS challenge. Subsidiaries where sales and expenses exactly offset one another — a stunning coincidence if true — needed more attention, too. But with a single agent largely responsible for this complex case, the IRS reports that it simply did not have the necessary resources to do the work.
Trump is just one prominent example of a much broader issue. The IRS receives more than 4 million partnership returns annually, but opens audits of only 7,500 of them each year. That’s a rate of essentially zero — and an invitation to mischief for those seeking to evade their tax obligations.
Fifth, successful tax enforcement requires that the IRS have the respect and confidence of the American people.
Enhanced enforcement must never compromise strict adherence to the Taxpayer Bill of Rights. And the bipartisan Taxpayer First Act rightfully focused on the importance of improving customer service. This must be on the agenda. It is not acceptable that in 2022 only 13 percent of calls made to the IRS were answered, or that taxpayers have waited eight months for refunds, or that only 2 percent of taxpayers file their taxes for free each year.
With demands coming from many quarters, it will be essential in the years ahead that the IRS not be distracted from its core mission: “Provide America’s taxpayers top-quality service … and enforce the law with integrity and fairness to all.”
Just as the military needs to stay focused on protecting our national security and the Federal Reserve on price stability and full employment, the IRS must deliver on these crucial objectives: create a system of tax administration that is more effective in collecting legally owed taxes, reduce burdens on American taxpayers and uphold fairness for all.