The Biden administration says wealthy Americans withhold more than $600 billion in unpaid taxes from the Treasury every year, and it has proposed a detailed plan to bulk up the Internal Revenue Service’s enforcement arm in an effort to increase tax compliance among high net worth individuals.
Total unpaid taxes “will rise to about $7 trillion over the course of the next decade if left unaddressed — roughly equal to 15% of taxes owed,” a report issued by the Treasury Department on Thursday said. “These unpaid taxes come at a cost to American households and compliant taxpayers as policymakers choose rising deficits, lower spending on necessary priorities, or further tax increases to compensate for the lost revenue.”
Improving the IRS’s ability to track down tax cheats will generate approximately $700 billion in additional revenue over 10 years, and far more in the years after that, the administration says.
Tax cheating is an international reality of life. The administration's estimate that the U.S. loses about 15% of the tax revenue it is owed to non-compliance places it at a level similar to the 16% across the European Union, according to research conducted at the University of London. The study found that across the EU, a little more than $1 trillion in taxes went uncollected in 2015.
Experts said the Treasury Department’s estimate of the taxes that go uncollected is reasonable, and that its belief that it can increase tax compliance through increased enforcement is plausible. However, they cautioned, it won’t be like flipping a switch.
Won’t happen overnight
“It's going to take time,” said Howard Gleckman, a senior fellow in the Urban-Brookings Tax Policy Center. “As they increase the staff, they're going to do this gradually over a period of many years. The people who have worked at the IRS, who know that place really well, say it takes five years to train an auditor — particularly when you're looking at the kind of very sophisticated tax avoidance that the IRS seems to want to look at. So yeah, I think that they can raise this kind of money, but I think nobody should expect them to be able to do it overnight.”
Others were less sure.
“I would say, on the face of it, I think it seems ambitious,” said Alex Muresianu, a federal policy analyst with the Tax Foundation in Washington. “I think that on the margin, doing better investigations at the IRS and doing a better job of enforcing laws we have is a good way to raise revenue. But I'm not sure that this large of an increase in budget will be used as effectively as they're hoping it will.”
Funding for American Families Plan
While reforming the country’s tax compliance regime might be considered a goal all to itself, the Biden administration released the plan in the context of its push for the American Families Plan, a legislative proposal that would invest in affordable child care, free education, increased availability of family and medical leave, and child tax credits.
However, Gleckman said, the money the Treasury collects won’t be nearly enough — or come soon enough — to fund the $1.8 trillion plan.
“If people in Congress think that closing the tax gap is going to pay for [it], they're dreaming,” he said. “It's a good thing to do. It’s good for maintaining the credibility of the tax code, and it will generate a significant amount of money. But it ain't gonna pay for a trillion-dollar infrastructure bill. They want to do that, they're gonna have to raise somebody's taxes.”
Plan details
There are four main elements to the administration’s plan, the most significant of which is the addition of $80 billion in funding to the IRS budget over the next decade. The agency’s budget has been slashed by 20% during the past decade, leading to a loss of experienced staff and a reduction in the number of lower-level IRS agents working their way up through the agency’s ranks.
The proposal also sets aside funding to overhaul the agency’s data management. The current system at the IRS is the oldest in the federal government, with elements dating to the 1960s, written in an obsolete programming language.
Additionally, the agency will crack down on unregulated tax preparers, increasing penalties for aiding and abetting tax evasion.
Collecting bank account data
The fourth element of the administration’s plan, which is generating some concern, is a proposal to require banks and other financial institutions to greatly increase the amount of information they provide to the IRS.
In addition to reporting interest payments above a certain threshold, the administration is planning to ask banks and financial services firms to "report gross inflows and outflows on all business and personal accounts from financial institutions, including bank, loan, and investment accounts but carve out exceptions for accounts below a low de minimis gross flow threshold.”
A coalition of banking trade groups expressed opposition to the plan earlier this month, writing in a joint letter that it would “impose cost and complexity that are not justified by the potential, and highly uncertain, benefits” and could expose customer data to abuse.
“We support efforts to increase compliance so that all taxpayers meet their responsibilities, but putting financial institutions in the position of reporting more information on their account holders — especially when the benefits are far from certain — is not the answer,” the groups wrote.
Gleckman, of the Tax Policy Center, raised the additional concern that the IRS might not have the ability to effectively make use of the data.
“They're asking for so much information, deposit and withdrawal information for every single bank account,” he said. “The IRS is already struggling with its ability to manage the data that it has. This will give them billions more pieces of data.”
