Some of the changes — such as billions of dollars in additional spending at the IRS — would require congressional approval, and many Republicans have long tried to shrink the agency. But the White House said the proposed investments would pay off by allowing the agency to collect the taxes that are due.
Treasury’s Office of Tax Analysis estimated that the changes could bring in an additional $700 billion in tax collections over the next decade, as well as $1.6 trillion in the decade after that. Treasury said Thursday that the current tax gap is about $600 billion per year, although IRS Commissioner Charles Rettig recently said the number could exceed $1 trillion. Even partly closing that gulf could go a long way toward paying for President Biden’s spending proposals, which include trillions of dollars for infrastructure, child care, manufacturing and other domestic spending priorities.
“At the crux of these proposals is a commitment to revitalizing tax enforcement,” Treasury’s paper states. “Working to close the tax gap reflects a commitment to ending our two-tiered tax system, one where most American workers pay their full obligations, but high earners who accrue income from opaque sources often do not.”
Treasury’s estimates face skepticism from many tax experts, and some of their new enforcement mechanisms could face political blowback among lawmakers. Treasury’s plan states that audit rates “will not rise relative to recent years” for those earning less than $400,000 per year, which is in line with the president’s campaign pledge not to raise taxes on middle-class taxpayers but may blunt the effectiveness of Treasury’s plan. Increasing IRS enforcement is considered politically easier than other measures, such as raising taxes, but will expose the administration to criticism that it is basing its plans on estimates that are more rosy than realistic.
In particular, the administration’s estimates may face skepticism from the Congressional Budget Office, the nonpartisan scorekeeper for congressional legislation. The CBO has said similar ideas to increase IRS enforcement could raise hundreds of billions of dollars but not the kind of money the administration is banking on. The Penn Wharton Budget Model has found that the administration’s IRS plan would raise less than $500 billion. Administration officials told reporters Thursday that they recognized the difficulties of getting the plan through Congress. Treasury previously released a summary of its IRS enforcement proposal as a way to pay for Biden’s “American Families Plan,” one of the White House’s two main domestic spending priorities.
“I think there is no way under the sun they can get $700 billion. They will be very pleased if they get $250 billion,” said Douglas Holtz-Eakin, a Republican policy analyst and former director of the CBO. “This is just completely unrealistic.”
The United States collected a little more than $3 trillion in revenue in 2020, but spent more than $6 trillion. As a result, the U.S. budget deficit last year eclipsed more than $3 trillion, by far the biggest one-year gap in American history. These numbers were significantly elevated because of the emergency spending authorized to confront the coronavirus pandemic.
Beefing up IRS enforcement could help address some of that gap, the Treasury report said. The key part of the tax compliance proposal is to increase the size of the IRS budget by about $80 billion over a decade, nearly increasing its size by 50 percent. Some of that funding would go to significantly increase the number of IRS agents and personnel, after the tax agency’s budget was cut by about 20 percent because of changes pushed by congressional Republicans.
Treasury says its plan would lead to the hiring and retention of 5,000 new enforcement personnel. It would in particular allow the IRS to hire “specialized” enforcement staff, particularly by funding the IRS divisions focused on scrutinizing large corporations and “global high-wealth and high-income individuals.”
The funding would also include about $6 billion for modernizing the IRS’s information technology systems and security funding. The Treasury report said “the IRS defends against approximately 1.4 billion sophisticated cyberattacks” each year. The funding would also help the administration implement its expansive tax credit programs, such as a new child benefit for tens of millions of American parents.
Increasing the IRS budget would require congressional approval, and although Democrats are largely supportive, the GOP is expected to oppose the change.
The second key proposal is to strengthen requirements surrounding what banks must tell the IRS about their customers. The agency would then use the additional information provided by the banks to “better target enforcement activities,” Treasury said Thursday, a measure in particular aimed at improving voluntary compliance through a deterrence effect.
Steve Rosenthal, a tax expert at the nonpartisan Tax Policy Center think tank, has raised questions about the administration’s reporting requirement plan and argues that it would cast too wide a net, by targeting not just the kinds of firms where underreporting is common but a much wider set of firms than would be useful or necessary.
“The assertion that rich guys are cheating to this level is unsupported by the literature,” Rosenthal said.
The third and fourth parts of the plan involve overhauling outdated IRS technology — some of which dates to the 1960s — so it is better at identifying tax evasion, as well as new penalties on tax preparers who “commit or abet” tax fraud.
Treasury’s plan would also target cryptocurrency as part of its enhanced reporting requirements, with cryptocurrency companies required to provide the IRS with more financial information. The reporting requirements would affect businesses receiving cryptocurrency with a fair market value of more than $10,000.
It described cryptocurrency and virtual currency as a “significant concern,” adding that they had grown to $2 trillion in market capitalization.
“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion,” the report said.
Bitcoin and other cryptocurrency had been extremely volatile this year, with some rocketing in value only to slide markedly and suddenly.
Treasury officials have emphasized that their efforts are aimed at reversing the decline in scrutiny of particularly high-income taxpayers and businesses. Audit rates for corporations with more than $20 billion in assets fell from 98 percent in 2010 to 50 percent in 2018, Treasury’s report said. Taxpayers earning more than $10 million faced audit rates of 19 percent in 2010 but just 7 percent in 2018. Audit rates declined for taxpayers broadly, but the decline in audits for the rich was particularly pronounced.