“It would not be outlandish to believe that the actual tax gap could approach and possibly exceed $1 trillion per year,” he said.
That problem is aggravated by a different tax gap — the favorable treatment the tax code provides wealthy, largely White taxpayers, compared to lower income, largely Black and Latino workers.
There should be no “race-based penalty or a discount on taxes,” Sen. Ron Wyden (D-Ore.), the committee chairman, said at a follow-up hearing this week. “Everybody ought to pay a fair share … . In practice, the U.S. tax code does not always work that way.”
Drawing from a report by the nonpartisan Institute on Taxation and Economic Policy, Wyden said an estimated 80 percent of the individual benefits under the Trump administration’s tax cuts went to White Americans.
“Nearly every component of tax law has a racial equity impact,” Sen. Elizabeth Warren (D-Mass.) said at this week’s hearing. She proposed giving the IRS “a big pot of money” to audit “the wealthiest taxpayers and the biggest corporations — targets where we know there’s a huge amount of money going uncollected.”
The inequity rests on long-established tax breaks that favor White Americans over Black Americans in three areas — marriage, homeownership and retirement, according to Dorothy A. Brown, an Emory University law professor. Tax subsidies for homeownership, for example, favor White people who are much more likely to be homeowners. Similarly, she told the committee, Black workers are much less likely to work for companies that offer tax favored retirement plans.
The nation’s “busted, old tax code” excels at rewarding “those who are fortunate enough to already have wealth,” Wyden said. “The lucky few with the top incomes can go years deferring their taxes, paying what they want and when they want. On the other hand, there’s no deferral for a Black nurse who pays taxes out of every paycheck or a Latina small business owner who pays taxes quarterly.”
Contributing to the tax gap is the employee gap. There are far fewer IRS staffers today than a decade ago. A report issued last year by the National Taxpayer Advocate, an office within the IRS, called recruitment, hiring and retention the agency’s “Most Pressing Problem #1.” Data from the report indicate that from fiscal 2010 to 2020, the agency’s budget and workforce each dropped 20 percent, even as filed tax returns rose 13 percent.
A 2020 report by the Treasury Inspector General for Tax Administration also highlighted the agency’s lack of focus on high-income individuals who do not pay taxes. The inspector general urged the agency to “designate a senior management official with appropriate resources” to work on the problem, but the agency disagreed, saying it has an executive committee that provides oversight and planning.
“It’s a national scandal that the wealthy are stealing billions and billions from American taxpayers …” Wyden told Federal Insider. “Going after tax-dodging billionaires and megacorporations and their armies of accountants and lawyers requires the IRS have adequate enforcement staff. There’s simply no way around it. Rebuilding the IRS so we are collecting what’s owed is a top priority as we move forward.”
When Republicans controlled Congress, they punished the IRS with budget cuts that led to a decade-long drop in government scrutiny of taxpayers. “The number of examining revenue agents, who handle complex enforcement cases, fell by 35 percent, and field collection revenue officers, who manage difficult collections cases, dropped by 48 percent,” Rettig told the committee last week. “The loss of approximately 17,436 enforcement employees since 2010 has resulted in the examination rate for individual returns falling by about 45 percent; for businesses with assets equal to or exceeding $10 million, the examination rate fell by about 72 percent.”
Wyden said the Biden administration’s budget proposal for a 10 percent increase in IRS funding is a good start, but “there is room for a more comprehensive strategy to lower the tax gap … On my watch the annual filing session from this point on will put a special focus on what the IRS has done over the previous year to catch the cheats and close the gap. There’s a lot of catching up to do.”
That’s going to take more than a one-year budget increase, because training IRS revenue agents and officers takes at least three years, according to National Treasury Employees Union President Tony Reardon.
“Having more employees to enforce the tax code will cut into that tax gap, bring in more revenue and give Americans the confidence that the IRS is applying the tax code fully and fairly,” he said. “However, there is only so much the IRS can do to reverse staffing reductions in a single year, and that is why we support multiyear investment in the IRS.”
Rettig acknowledged the IRS has a disadvantage with current staffing levels. “We do get outgunned,” Rettig said. “I mean, there’s no other way to say it.”