Defund the (Tax) Police

Over the last decade, Congress has steadily cut funding for the Internal Revenue Service (IRS) enforcement of US tax law.  As a result, the IRS has lost almost half its auditors and more than one-third of its revenue collectors.  Not surprisingly, this has led to steep drops in tax collection, especially from the wealthy and corporations.

 As part of President Biden’s effort to pay for his $1.9 trillion infrastructure bill, he has proposed an increase in funding to the IRS of $100 billion to restore the agency to its 2010 level of enforcement personnel.  Republicans, however, have unanimously objected to the funding increase.  The problem is that Biden needs the IRS restoration to collect funds that will be necessary to pay for the bill.

According to IRS Commissioner Charles Rettig, the United States loses up to $1 trillion in unpaid taxes per year, in part because there are not enough employees to adequately audit returns for fraud and collect the appropriate revenue.  

Restoring IRS funding is not a “tax increase,” so dreaded by conservatives.  Rather, it only enforces existing law in order to collect from tax cheats.  But the return on investment is extraordinary, up to twenty-four times that of the initial cost.  Estimating this return on investment is difficult since it involves new, more sensitive methods to track the use of cryptocurrency, offshore tax evasion, illegal income undetected by the IRS, and underreporting from pass-through businesses.  It must also include the indirect effect of “voluntary” compliance once the tax cheats realize they are much more likely to be caught.

Current IRS regulations make it far easier to monitor tax compliance among those who work for wages than among those who whose income derives from business and capital gains.  Corporate profits are, if anything, harder to monitor.  IRS requires most employers to deduct taxes from wages, report them and send the W-2 forms directly to the IRS.  Social Security also requires withholding.  This collection of taxes occurs automatically, so cheating is almost impossible.  

But most income received by the wealthy and all income earned by corporations are not subject to W-2 reporting, leading to possibilities for many different kinds of tax fraud.  There are also, of course, many loopholes in the tax law — which is a serious problem in itself — but I am referring here only to fraud.

As a physician and public speaker for twenty years, I was, for tax purposes, designated as a “sole proprietor because of fees I earned giving speeches and seminars at medical schools, universities, and other institutions.”  Accordingly, I had to file separate business schedules on my tax returns to record income and expenses and calculate my tax.  I immediately noticed how easy it would have been to cheat.  

IRS required reports from those who paid me only if the payment exceeded $600, which it usually did not.  So, even though I was legally required to report all that income, IRS had no way of checking up on me without an intensive audit.  It would also have been easy to pad my expense accounts.  This is, of course, only a minor example.  I was astonished by how easy it would have been to commit virtually undetectable fraud.  

Frequent IRS audits of the wealthy and corporations are necessary to discover fraud and recoup the losses.  Due to budget cuts since 2010, however, IRS has lost half of its revenue officers (who collect taxes) and a third of its auditors (who monitor the more complex returns of corporations and the wealthy).  As a result, according to IRS data, the share of tax returns that the IRS audits, especially for ultrawealthy individuals and businesses, has fallen by two-thirds: Just 8.16 percent of returns with reported incomes of $10 million or more are examined.  The IRS now has fewer auditors than at any time since World War II.

 
About 99% of taxes are paid to the IRS when there is automatic withholding and reporting to the agency, but only 45% of what’s owed gets paid when those are lacking.  

This is not just a question of government income.  It is a question of basic fairness.  

Since the beginning of the Republic, political conservatives have favored smaller government and lower taxes.  Beginning in 1980 with the Reagan Administration, the Republicans Party has consistently cut federal taxes.  As much as I may disagree with it, smaller government with less tax is a legitimate political stance, appropriate for democratic debate and legislative decision making.  Republican opposition to the increasing the IRS budget, however, is an entirely different matter.  It is not about cutting taxes but about encouraging the wealthy and the corporate world to flout the law, defraud the government and steal money from the rest of us.