The latest infrastructure proposal, approved by the White House and a bipartisan group of Senators, suggests that the IRS could raise an additional $ 100 billion over the next 10 years by simply stepping up enforcement and making sure the government does collects what taxpayers actually owe – also known as closing the “tax gap”. Biden also suggested earlier this year that if he could increase the IRS’s budget by $ 80 billion to pay for enforcement, he could increase government revenues by $ 700 billion over 10 years – money with which he funded his American Families plan, which would invest in childcare, pre-K, and colleges.
However, it is unclear exactly how much could be raised and how much it would cost to step up enforcement. This is how it could work:
The difference between the amount legally owed and the amount actually paid to the IRS – known as the “tax gap” – could be anywhere from $ 381 to $ 1 trillion annually.
The latest available IRS report says that nearly 84% of federal taxes are paid voluntarily and on time, causing $ 441 billion in undrawn. After late payments and enforcement actions, the gap narrowed to $ 381 billion, the report said.
But that’s based on 2011, 2012, and 2013 tax years, and IRS Commissioner Chuck Rettig told lawmakers earlier this year that he believes the tax gap could be much bigger now – up to a massive $ 1 trillion a year.
One reason why the earlier report underestimated the tax gap? The use of virtual currencies has been increasing since 2013, which is accompanied by new compliance challenges. The earlier estimates may also have underestimated unreported offshore revenue and the use of transit companies. The Biden administration put the number somewhere in the middle. A recent Treasury Department analysis found that the tax gap was nearly $ 600 billion in 2019 and could rise to about $ 7 trillion over the next decade if left untreated – roughly 15% of taxes owed.
How much can actually still be collected?
It is unlikely that the IRS will ever be able to bring the tax gap to zero no matter how much it increases enforcement.
The agreement between a bipartisan group of senators and the White House suggests they believe another $ 100 billion could be raised in ten years – and they plan to use that money to fund infrastructure investments.
“We think this is spot on,” said John Ricco, assistant director of policy analysis at Penn Wharton Budget Model, who analyzed the bipartisan proposal. A separate report from the Congressional Budget Office also suggests this is possible, though it depends on how much is being spent to bolster the IRS. It said the agency could raise an additional $ 61 billion over 10 years if it spends an additional $ 20 billion on investigations and collections, or an additional $ 103 billion if it spends $ 40 billion over 10 years would spend.
Who doesn’t pay?
The tax gap highlights how some people and businesses are failing to pay their fair share. But it’s not just the result of bad actors trying to evade the tax officer. Some of them are also accidental errors.
“Failure to comply with tax laws often involves unintentional errors that can be traced back to the fact that the now extremely complex tax law was not fully understood,” Rettig recently wrote in a memo. Most unpaid taxes result from people reporting less income than they earned, especially income from business and self-employment. According to the Federal Responsible Budget Committee, around 9% of the gap is due to non-filing and 11% to underpayment of taxes that were correctly reported. The Biden government has announced that it will address the rich with more assertiveness. A report by former Treasury Secretary Larry Summer and Natasha Sarin, an assistant professor at the University of Pennsylvania, found that high-income individuals are more likely to under-report their income because more of it comes from opaque categories like dividend income and capital gains, and income from property.
Can the IRS catch up?
The agency is tight on cash and needs a bigger budget to hire more staff if it is to close the tax gap.
His budget has shrunk by 20% over the past decade, resulting in a 22% reduction in staff. With fewer people working on enforcement, the percentage of individual income tax returns examined decreased by 46%, and the percentage of corporate tax returns examined fell 37% between 2010 and 2018, according to the Congressional Budget Office.
The agency was still burdened during the pandemic when many of its employees were sent to work from home while Congress increased its workload by hiring the IRS to distribute three rounds of stimulus payments and the new, expanded child tax credit.