Yet, during the past decade, budget cuts have substantially diminished the IRS workforce. In real terms, the IRS budget is smaller than it was in 2010, and it has 21,000 fewer employees. The IRS has fewer auditors today than at any time since World War II. Moreover, the agency has struggled to keep pace as complicated tax structures, such as partnerships and pass-throughs, have grown in popularity. Workforce attrition has been most pronounced among agents who examine these complicated tax filings: Thirty-five percent fewer revenue agents handle these returns today than a decade ago.
While the IRS has been starved for resources, its responsibilities have grown. Since 2010, the agency has been tasked with administering significant provisions of the Affordable Care Act. Since the coronavirus pandemic began, the IRS has delivered three rounds of federal direct payments to hundreds of millions of taxpayers. It is gearing up to accomplish another historic first: delivering periodic advance payments of an expanded child tax credit.
Between a decreased budget and increased responsibilities, something had to give. Unfortunately, that something has been taxpayer service. The National Taxpayer Advocate recently reported that just 24 percent of calls to the IRS are answered; at the onset of the covid-19 crisis, the IRS was unable to answer taxpayer questions for months. There has also been a substantial decline in enforcement scrutiny of high-earners and large corporations with complex returns: Audit rates for millionaires have fallen more than 70 percent since 2011; audits of large corporations decreased from essentially 100 percent a decade ago to less than 50 percent, according to the most recent IRS estimates.
This situation is no fault of the IRS or its committed workforce, who are dedicated to fair implementation of the tax code and the strongest possible support for taxpayers. Provided appropriate resources, the IRS can make good on its commitments.
President Biden’s proposal would restore our tax administration system to make it far fairer and more effective. This would benefit everyone who pays their taxes. It would produce a great deal of revenue by reducing the enormous gap between taxes legally owed and taxes actually paid — much of it through increased voluntary compliance. And it would improve taxpayers’ interactions with the IRS.
Achieving these goals will take time, persistence and sound management, but the investment is likely to pay for itself many times over, for decades to come.
Some may say: Great goals, but how would these changes be accomplished?
Three ways: information, resources and technology.
The Biden proposal includes provisions on third-party reporting, leveraging information from financial services providers to learn basic information about account inflows and outflows. This information could assist taxpayers in filing accurate returns and help the IRS better focus collection efforts. Research shows that when the IRS has access to third-party reporting, compliance rates top 95 percent. Without third-party information reporting, compliance rates are below 50 percent. Reliable information is critical to an effective and fair tax system.
The proposal provides a multiyear stream of mandatory funding for productive investments in technology that would greatly improve the efficiency of IRS compliance and taxpayer service activities. It also provides for rebuilding the IRS workforce, which would help resolve taxpayers’ cases more rapidly and efficiently.
These advancements will promote voluntary compliance and assist the IRS in targeting enforcement activities — decreasing the frequency of costly “no change” audits for compliant taxpayers. Additional investments in customer service would give the agency resources to communicate securely and efficiently with all taxpayers.
The Treasury career staff estimates that the administration’s tax compliance initiatives would raise $700 billion in revenue over a decade. Some believe the revenue potential is substantially larger — two of us have conservatively estimated the possibility of raising twice as much: $1.4 trillion through investments such as those Biden has proposed. The significant revenue at stake is a byproduct of the magnitude of the tax gap, which costs the country and honest taxpayers 3 percent of gross domestic product annually in taxes that are owed but unpaid. Uncollected taxes today equal the total taxes paid by the lower 90 percent of individual taxpayers. The scope of the tax compliance problem means that comprehensive proposals to address it would reap substantial benefits.
The Biden administration has advanced such a comprehensive, long-term program for improving the tax administration system. If passed by Congress and effectively managed, it would produce enormous, lasting benefits.