HOW THE RICH GET RICHER #4

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

The inability of the Internal Revenue Service (IRS) to enforce tax laws has resulted in a high level of tax evasion by wealthy individuals and corporations. Some experts estimate that as much as $1 billion a year in taxes owed are not paid.

As the country’s tax collector and tax enforcer, the IRS has never been a popular agency among the public or politicians. However, the importance of the IRS’s work in enforcing tax laws, maintaining a fair and functional tax system, and collecting the revenue the government needs to operate had been broadly respected.

This changed when Republicans gained control of the U.S. House of Representatives and Newt Gingrich became the House leader in 1994. Republicans began vilifying the IRS and using “abolish the IRS” as a sound bite. Republican presidential candidates, including Sen. Lugar in 1996 and Sen. Cruz in 2016, made abolishing the IRS a central policy proposal. In 1998, Republicans introduced a bill in Congress to repeal the Internal Revenue Code (the country’s tax laws) and abolish the IRS. [1]

The Republicans have held congressional hearings on alleged abuses by the IRS. Despite the fact that in most cases investigations by the Government Accountability Office (GAO) and others have debunked the alleged abuses, the IRS’s reputation has been seriously undermined. This gave Republicans cover for passing laws weakening the IRS and its tax enforcement.

Beginning in 2010, Republicans in Congress undertook a multi-year initiative to cut the IRS’s budget and enforcement capacity. Since 2010 when its budget peaked at $14 billion, the IRS’s budget has been cut by about 20% (adjusted for inflation). Its staff has been cut by nearly one-quarter to 76,000 full-time employees and the number doing enforcement has fallen from 23,500 to 6,500, a 72% reduction. [2] It has the fewest auditors it has had since the 1940s and it has the oldest computer technology in the federal government.

The IRS recently announced a backlog of 35 million unprocessed tax returns, three times the number from a year ago and four times what it was in 2019. This means taxpayers have to wait longer for their refunds, payments from the Earned Income Tax Credit to low-income families will be delayed, and some transactions, like mortgage approvals, that require current income tax documentation will be delayed. It also revealed that only 3% of the calls to its most popular, toll-free hotline reach a real person. Despite its challenges, it has processed 137 million individual tax returns and sent refunds of more than $281 billion.

Tax obligations expire (i.e., become uncollectible) after ten years if the IRS doesn’t pursue them. In 2017, $8.3 billion of tax obligations expired, up from $482 million in 2010 (a 17-fold increase). Investigations of people who didn’t file a tax return have fallen from 2.4 million in 2011 to 362,000 in 2018 (down 85%). Similarly, collections from people who file but don’t pay have dropped dramatically. In 2017, the IRS conducted 675,000 fewer audits than in 2010, a 42% drop in the audit rate. The audit rate has dropped roughly 70% on those with incomes over $200,000 and but only about 40% for those with incomes under $200,000. This is a key contributor to increased tax evasion by the wealthy.

The impact of the IRS’s budget cuts has been exacerbated by substantial new responsibilities that it has been given under the Affordable Care Act and the response to the pandemic. In responding to the pandemic, the IRS has been tasked with distributing three rounds of relief payments, implementing changed rules on unemployment benefits and tax credits, and, most recently, sending out monthly checks to most families with children. With a significantly reduced budget and staff, it has been expected to do all of these things while trying to maintain its core business of processing tax returns. [3]

President Biden has proposed increasing the budget of the IRS by $40 billion over ten years to reduce tax evasion and generate revenue to help pay for infrastructure investments. He estimates that this increased IRS funding would raise government revenue by $140 billion over those ten years. The Congressional Budget Office (CBO) estimates added revenue of $103 billion and others have other estimates, but everyone agrees that increased enforcement would generate significant revenue. It would also make our tax system fairer by reducing tax evasion, which is largely done by wealthy individuals and corporations. However, it might well take five years to make the upgrades to the IRS’s computer systems and to hire and train the new staff needed to achieve these results.

Initially, the Republicans who were part of the bipartisan group of 21 Senators working on the infrastructure investment bill endorsed the increased funding for the IRS, but now they are backing away from it after hearing opposition from some of their wealthy backers.

Support for increased funding for the IRS has come from five former Secretaries of the Treasury, from both Republican and Democratic administrations. They state that increased funding for the IRS would “raise significant revenue and create a fairer, more efficient” tax system. [4]

The IRS and our income tax system depend, in large part, on the voluntary compliance and honesty of taxpayers. If taxpayers’ come to believe that the tax system is not fairly administered, voluntary and honest tax compliance is likely to decline. This could have dire implications for government revenue and for the IRS’s ability to do its job. It is important that the public believe that people pay the taxes the law says they owe. This encourages compliance with tax laws even if the overall perception is that the wealthy are not paying their fair share under our current tax laws. Then, the focus can be on making our tax laws fairer.

I urge you to contact your U.S. Representative and Senators and to ask them to support additional funding for the IRS so it can effectively enforce our tax laws. You can find contact information for your U.S. Representative at  http://www.house.gov/representatives/find/ and for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

Please also contact President Biden and thank him for proposing increased funding for the IRS because this will mean it can more effectively implement our tax laws. You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1]     Kiel, P., & Eisinger, J., 12/11/18, “How the IRS was gutted,” ProPublica and The Atlantic (https://www.propublica.org/article/how-the-irs-was-gutted)

[2]     Puzzanghera, J., 7/5/21, “Aggressive IRS could help with roads bill,” The Boston Globe

[3]     Stein, J., 6/30/21, “IRS faces 35 million unprocessed tax returns as backlog swells, watchdog says,” The Washington Post

[4]     Puzzanghera, J., 7/5/21, see above