'Understaffed' IRS Is Letting Top 1% Avoid Taxes, Biden Administration Laments
Wealthiest Americans avoid $163B in taxes annually, but auditors warn that Biden's plan to fix the gap may yield underwhelming results.
The Biden administration on Wednesday blamed a staffing shortage at the Internal Revenue Service for enabling the wealthiest 1% of Americans to shirk $163 billion in tax bills annually, pointing to the finding to support its plan for dramatically increasing resources for the tax agency.
More than one-quarter of unpaid taxes comes from just the top 1% of earners in the United States, according to a new report from the Treasury Department, with more than 20% stemming from the top 0.5%. The IRS is picking its battles, Treasury said, creating a separate tax system for low-income Americans and the wealthy who can afford to hire professionals to help them take advantage of IRS' shortcomings.
“Currently, an under-staffed IRS, with outdated technology, is unable to collect 15% of taxes that are owed, and a lack of resources means that audit rates have fallen across the board, but they’ve decreased more in the last decade for high earners than for Earned Income Tax Credit recipients,” said Natasha Sarin, Treasury's deputy assistant secretary for economic policy and author of the report.
To fully and fairly enforce the tax code, Sarin said, the IRS needs to "hire and train revenue agents who can decipher their thousands of pages of sophisticated tax filings." President Biden has called for an $80 billion injection into the IRS over the next decade, saying it would bring in $700 billion in revenue.
The Congressional Budget Office, however, said last week that the White House was painting too rosy a picture. CBO projected the government would bring in just $200 billion in new revenues over a decade, though it said new information reporting requirements and some tax code changes could produce a higher number. The office predicted that taxpayers would find new ways of evading their tax bills and said outdated technology could hamper the productivity of IRS employees. Hiring surges would help, CBO said, but the average audit takes 30 months to complete and employees can require extensive training. IRS management has said it is targeting mid-career and highly skilled employees for its new staff, but CBO cautioned it may not be able to hire "its desired mix of candidates." CBO also suggested employee turnover could be higher than IRS is predicting.
The Biden administration and IRS leaders have called IRS funding critical to offset more than a decade of cuts or relatively flat spending at the agency. IRS has shed 17,000 enforcement workers over the last decade, disproportionately from highly specialized, senior examiners who typically focus on the wealthiest individuals and corporations. IRS Commissioner Charles Rettig has said boosted enforcement would focus on high net-worth individuals, large pass throughs, corporate compliance, employment tax field examinations and non-filers with virtual currency, among others. The hiring surge would also go toward customer service efforts, with the goal of improving the phone answering rate to 75% of calls. During the COVID-19 pandemic, that rate dropped to 7%.
A recent poll found that 68% of Americans approve of the plan to dramatically boost staff and resources at IRS.
A bipartisan group of senators, working with the White House, originally included the boosted IRS funding and hiring as part of their $1 trillion infrastructure plan, but ultimately scrapped it from the measure after Republicans pushed back. Democrats are now looking to include the funding as part of a much larger package to further increase infrastructure spending and pass other Biden priorities. They can pass that measure without any Republican support through a process called reconciliation, though they cannot afford to lose support from a single Democratic senator.
Undeterred by CBO's more pessimistic projections, Treasury said in its report that in the second decade after the funding increase, the IRS will collect an additional $1.6 trillion in revenue. Sarin added the Biden administration has the "singular objective" of ending the "two-tiered tax system" that benefits the wealthiest Americans.
“Giving the IRS the information and resources that it needs will generate substantial revenue,” Sarin said. “But even more importantly, these reforms will create a more equitable, efficient tax system.”
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