The purpose of Biden’s plan was not to stimulate audits but to close the “tax gap” – the amount of taxes currently owed but not paid. We know firsthand that this is a gigantic number – in 2019 alone it was $ 574 billion, and it is estimated to grow to $ 7 trillion in the next 10 years. In perspective, this equates to the amount of federal income tax that the poorest 90 percent of earners pay in federal taxes on an annual basis.
Closing the tax gap doesn’t require reducing the IRS to hard-working families and small business owners. Quite the contrary: most of the people who do not pay their fair share are high income people who use financial vehicles to avoid tax bills. Closing the tax gap is a good policy for both parties, as it reduced pressure to raise taxes for law-abiding taxpayers.
Here’s an amazing statistic: Workers who get a W-2 pay 99% of the taxes they owe. These are the ones who funnel their income through financial vehicles that the IRS does not or cannot monitor and who pay as little as 50% of what they owe. The tax gap has widened because an increasing number of tax filers, especially high income earners, do not receive W-2 or other forms that declare their income. It is fundamentally unfair and unsustainable.
Biden’s idea for strengthening the IRS was not to add audits, but to improve technology – which is a smart use of federal money to generate revenue. When we were at the IRS, audits were pretty much the only tool we had to find most of this missing income. But it was and is an ineffective tool. While there is a critical role for audits, they bring in less than 0.5% of IRS revenue, and 20-40% of audits produce nothing.
The main reason the tax system works when it works is that taxpayers, knowing that they and the IRS have the same information about their income, simply pay what they owe. So the best way to do this for wealthy tax avoiders is to improve reporting of income sources that are not currently collected by the IRS. This additional declaration will increase the Efficiency of IRS enforcement activity and also be much less burdensome on taxpayers. Starting an audit to gather information from a taxpayer, only to find that there was no problem in the first place, is not good for anyone.
What makes the Biden administration’s plan more effective than past attempts to improve tax collection is a three-legged policy stool. The first is improved access to income information, accompanied by more reliable funding for the agency and technological advances.
Over the past 10 years, the IRS has been crippled by funding cuts, an increase in the quantity and complexity of tax returns, staff losses, and the complex process of distributing Covid relief. The Biden plan calls for a steady and manageable 6% per year increase above inflation in new funding over 10 years, which should improve services for ordinary taxpayers. It also relies on communication of information and technology to determine where taxpayers are not paying what they owe and reduce the proportion of unnecessary audits on taxpayers who pay accurately.
Today, banks and other financial institutions report on a spectrum of transactions, from income to interest to income from securities transactions. The Biden plan would require these institutions to report two additional digits: total inflows and total outflows from certain accounts.
It will not be a new onerous requirement. Banks and financial institutions currently issue over $ 1099 billion on a range of transactions, from income to interest to proceeds from securities transactions. This new 1099 is a reasonable step that will impose minimal costs on banks and financial institutions, help taxpayers file more accurate returns, and allow the IRS to better determine where to look for scofflaws.
Modern software technology, such as that used to detect credit card fraud, would allow the IRS to analyze all the information it has, including the increase in financial account reporting mentioned above, d ” other reporting information such as income from foreign accounts and income from companies organized in partnerships and the results of past audits, to identify returns with possible deficiencies. Currently, the IRS can only use this information as part of a laborious manual audit.
Are we talking about closing the whole tax gap? Of course not. The administration estimated that its plan would reduce the tax gap by around 10% over 10 years. Three credible and independent estimates show that the administration’s proposal will produce more than $ 1 trillion within 15 years. But that would still represent a significant amount of new revenue without imposing new taxes.
As Congress has done in the past when granting legislative powers to the IRS, it should also provide additional protections to taxpayers and insist on clear objectives for the IRS to ensure that funds are used. way to generate the greatest increase in income from voluntary contributions. compliance as well as enforcement, and with minimal burden on taxpayers. Establishing these goals and protections in law will also provide Congress with an effective means of exercising oversight.
As Congress contemplates tax increases that would be paid by those who already pay what they owe, it is particularly important to seize this opportunity to collect a significant portion of the tax gap. This can be achieved by using modern technology to analyze information and increase service to taxpayers, not just increasing verification.