Depletion of IRS Enforcement Is Undermining the Tax Code
Testimony of Chye-Ching Huang, Senior Director for Economic Policy, CBPP*
Before the House Ways and Means Committee
End Notes
* This testimony draws heavily on prior work by the author and CBPP, cited below.
[1] Internal Revenue Service, “SOI Tax Stats – IRS Data Book,” Table 9a, updated December 19, 2019, https://www.irs.gov/statistics/soi-tax-stats-irs-data-book.
[2] Taxpayer Advocate Service, “Annual Report to Congress,” 2019, p. 23, https://taxpayeradvocate.irs.gov/2019AnnualReport.
[3] More recent IRS data show that the individual audit rate has continued falling, reaching 0.45 percent in 2019. However, comparable data for income groups and corporations are not yet available. Internal Revenue Service, “IRS Progress Update FY2019,” 2019, p. 25, https://www.irs.gov/pub/irs-pdf/p5382.pdf.
[4] Total positive income.
[5] Internal Revenue Service, “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013,” https://www.irs.gov/pub/irs-pdf/p1415.pdf.
[6] Natasha Sarin, Lawrence H. Summers, and Joe Kupferberg, “Tax Reform for Progressivity: A Pragmatic Approach,” Hamilton Project, https://www.hamiltonproject.org/assets/files/SarinSummers_LO_FINAL.pdf.
[7] John A. Koskinen, “Prepared Remarks of John A. Koskinen,” Tax Policy Center, April 8, 2015, p. 2, https://www.urban.org/sites/default/files/publication/49026/2000180-prepared-remarks-of-irs-commissioner-before-tpc.pdf.
[8] Samantha Jacoby, “Policymakers Should Ensure Pass-Throughs Pay More of Taxes They Owe,” Center on Budget and Policy Priorities, November 22, 2019, https://www.cbpp.org/blog/policymakers-should-ensure-pass-throughs-pay-more-of-taxes-they-owe.
[9] Letter from Charles P. Rettig to Senator Ron Wyden, September 6, 2019, pp. 4-5, footnote 1, https://www.documentcloud.org/documents/6430680-Document-2019-9-6-Treasury-Letter-to-Wyden-RE.html. Also see Internal Revenue Service, “SOI Tax Stats – IRS Data Book,” Table 9a, updated December 19, 2019, https://www.irs.gov/statistics/soi-tax-stats-irs-data-book. The 2019 Taxpayer Advocate Service report to congress suggests that Revenue Agent staffing has continued to fall, with a 39 percent decline between 2010 and 2019. Taxpayer Advocate Service, “IRS FUNDING: The IRS Does Not Have Sufficient Resources to Provide Quality Service,” 2019, p. 27 https://taxpayeradvocate.irs.gov/Media/Default/Documents/2019-ARC/ARC19_Volume1_MSP_03_IRSFUNDING.pdf. The number of Revenue Officers, who collect money owed, dropped by 50.4 percent over the same period.
[10] Internal Revenue Service, “SOI Tax Stats – IRS Data Book,” Table 9a, op. cit.
[11] See, for example: Paul Kiel, “The IRS Decided to Get Tough Against Microsoft. Microsoft Got Tougher.” ProPublica, January 22, 2020, https://www.propublica.org/article/the-irs-decided-to-get-tough-against-microsoft-microsoft-got-tougher; Paul Kiel, “Who’s Afraid of the IRS? Not Facebook,” ProPublica, January 23, 2020, https://www.propublica.org/article/whos-afraid-of-the-irs-not-facebook.
[12] Jesse Eisinger and Paul Kiel, “After Budget Cuts, the IRS’ Work Against Tax Cheats Is Facing ‘Collapse,’” ProPublica, October 1, 2018, https://www.propublica.org/article/after-budget-cuts-the-irs-work-against-tax-cheats-is-facing-collapse.
[13] Jesse Eisinger and Paul Kiel, “You Can’t Tax the Rich Without the IRS,” ProPublica, May 3, 2019, https://www.propublica.org/article/you-cant-tax-the-rich-without-the-irs-internal-revenue-service.
[14] OECD and The World Bank, “Improving Co-operation between Tax Authorities and Anti-Corruption Authorities in Combating Tax Crime and Corruption,” 2018, https://www.oecd.org/tax/crime/improving-co-operation-between-tax-authorities-and-anti-corruption-authorities-in-combating-tax-crime-and-corruption.pdf.
[15] Currently there are 631 such corporations.
[16] IRS, “LB&I Announces Large Corporate Compliance Program,” May 16, 2019, https://www.irs.gov/newsroom/lbi-announces-large-corporate-compliance-program.
[17] Kiel, “Who’s Afraid of the IRS? Not Facebook.”
[18] Internal Revenue Service, “SOI Tax Stats – IRS Data Book,” Table 9a, op. cit.
[19] Internal Revenue Service, “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013,” op. cit.
[20] Michael Cooper et al., “Business in the United States: Who Owns It and How Much Tax Do They Pay,” Office of Tax Analysis, October 2015, https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-104.pdf.
[21] Treasury Inspector General for Tax Administration, “Billions of Dollars of Nonfiler Employment Taxes Went Unassessed in the Automated 6020(b) Program Due Primarily to Resource Limitations,” September 16, 2019, https://www.treasury.gov/tigta/auditreports/2019reports/201930069_oa_highlights.html.
[22] Andrew Johns and Joel Slemrod, “The Distribution of Income Tax Noncompliance,” National Tax Journal, Vol. 63, No. 3, September 2010, https://assets.documentcloud.org/documents/5219189/The-Distribution-of-Tax-Noncompliance.pdf.
[23] Sarin, Summers, and Kupferberg, p.330, op. cit.
[24] Jesse Eisinger and Paul Kiel, “The IRS Tried to Take on the Ultrawealthy. It Didn’t Go Well.” ProPublica, April 5, 2019, https://www.propublica.org/article/ultrawealthy-taxes-irs-internal-revenue-service-global-high-wealth-audits.
[25] “Testimony of The Honorable J. Russell George Treasury Inspector General for Tax Administration before the Committee on Appropriations, Subcommittee on Financial Services and General Government,” U.S. House of Representatives, September 26, 2019, https://www.treasury.gov/tigta/congress/congress_09262019.pdf.
[26] Internal Revenue Service, “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013,” op. cit. The EITC contribution to the gross tax gap over 2011-2013 was $27 billion annually, which is 6 percent of the $441 billion gross tax gap and 8 percent of the $352 billion underreporting tax gap (the latter figure is most comparable to the top 1 percent share, which is calculated as a share of the underreporting tax gap).
[27] Congressional Budget Office, “Options for Reducing the Deficit: 2019-2028,” December 2018, p. 307, https://www.cbo.gov/system/files/2019-06/54667-budgetoptions-2.pdf.
[28] Rettig, p. 1, op. cit. A correspondence examination costs the IRS approximately $150.
[29] See, for example: Kiel, “The IRS Decided to Get Tough Against Microsoft. Microsoft Got Tougher;” Kiel, “Who’s Afraid of the IRS? Not Facebook.”.
[30] Taxpayer Advocate Service, “Annual Report to Congress,” February 2018, Vol. 1, https://taxpayeradvocate.irs.gov/Media/Default/Documents/2018-ARC/ARC18_Volume1.pdf.
[31] Paul Kiel and Hannah Fresques, “Where in The U.S. Are You Most Likely to Be Audited by the IRS?” ProPublica, April 1, 2019,” https://projects.propublica.org/graphics/eitc-audit. Presenting estimates from Kim M. Bloomquist, “Regional Bias in IRS Audit Selection,” Tax Notes Federal, March 19, 2019. For further discussion of geographic and racial implications of these audit rate trends, see Chye-Ching Huang and Roderick Taylor, “How the Federal Tax Code Can Better Advance Racial Equity,” Center on Budget and Policy Priorities, July, 25, 2019, https://www.cbpp.org/research/federal-tax/how-the-federal-tax-code-can-better-advance-racial-equity.
[32] See Chuck Marr, “JCT Highlights Pass-Through Deduction’s Tilt Toward the Top,” Center on Budget and Policy Priorities, April 24, 2018, https://www.cbpp.org/blog/jct-highlights-pass-through-deductions-tilt-toward-the-top.
[33] Emily Horton, “Tax Planner: Drive Wealthy Clients Through ‘Gaping Hole’ in Tax Code,” Center on Budget and Policy Priorities, May 31, 2018, https://www.cbpp.org/blog/tax-planner-drive-wealthy-clients-through-gaping-hole-in-tax-code.
[34] For a further of the ways that the 2017 tax law encourages tax gaming, see Chuck Marr, Brendan Duke, Chye-Ching Huang, “New Tax Law Is Fundamentally Flawed and Will Require Basic Restructuring,” Center on Budget and Policy Priorities, August 14, 2018, https://www.cbpp.org/federal-tax/fundamentally-flawed-2017-tax-law-largely-leaves-low-and-moderate-income-americans; and David Kamin et al., “The Games They Will Play: An Update on the Conference Committee Tax Bill,” December 18, 2017, https://ssrn.com/abstract=3089423.
[35] Kim M. Bloomquist, “The Tax Gap: Holding Steady or Missing in Action?” Tax Notes Federal, October 28, 2019, https://www.taxnotes.com/tax-notes-federal/information-reporting/tax-gap-holding-steady-or-missing-action/2019/10/28/2b1p7.
[36] Sarin, Summers, and Kupferberg, p.330, op. cit.
[37] Michael Cooper et al., op. cit.
[38] Government Accountability Office, “Foreign Asset Reporting: Actions Needed to Enhance Compliance Efforts, Eliminate Overlapping Requirements, and Mitigate Burdens on U.S. Persons Abroad,” GAO-19-180, April 2019, https://www.gao.gov/assets/700/698133.pdf.
[39] Congressional Budget Office, op. cit.
[40] Office of Management and Budget, “The Appendix, Budget of the United States Government, Fiscal Year 2017: Department of the Treasury,” p. 1047, https://obamawhitehouse.archives.gov/sites/default/files/omb/budget/fy2017/assets/tre.pdf.
[41] This should be only an initial goal. Since 2010 the number of returns filed has grown 9 percent, and the IRS has been asked to implement and enforce new regimes including under the Foreign Account Tax Compliance Act, the Affordable Care act, and the 2017 tax law.
[42] Rettig, p. 4, op. cit.
[43] Specifically, both proposed discretionary cap adjustments. See Chuck Marr, “Senate Should Pave Way for Rebuilding IRS Enforcement,” Center on Budget and Policy Priorities, August 1, 2019, https://www.cbpp.org/blog/senate-should-pave-way-for-rebuilding-irs-enforcement.
[44] Taxpayer Advocate Service (2019), op. cit.
[45] Sarin, Summers, and Kupferberg, p.330, op. cit.
[46] Robert Greenstein, John Wancheck, and Chuck Marr, “Reducing Overpayments in the Earned Income Tax Credit,” Center on Budget and Policy Priorities, January 31, 2019, https://www.cbpp.org/research/federal-tax/reducing-overpayments-in-the-earned-income-tax-credit.
[47] Ibid.
[48] Paul N. Van de Water, “2017 Tax Law Heightens Need for More Revenues,” Center on Budget and Policy Priorities, November 15, 2018, https://www.cbpp.org/research/federal-tax/2017-tax-law-heightens-need-for-more-revenues.
[49] Samantha Jacoby, “Corporation-Friendly Treasury Regulations Reducing Federal Revenues,” Center on Budget and Policy Priorities, February 6, 2020, https://www.cbpp.org/research/federal-tax/corporation-friendly-treasury-regulations-reducing-federal-revenues; Samantha Jacoby, “Pass-Through Deduction Regulations Reflect Industry Lobbying,” Center on Budget and Policy Priorities, January 30, 2019, https://www.cbpp.org/blog/pass-through-deduction-regulations-reflect-industry-lobbying; Samantha Jacoby, “Final Opportunity Zone Rules Could Raise the Tax Break’s Cost,” Center on Budget and Policy Priorities, February 3, 2020, https://www.cbpp.org/blog/final-opportunity-zone-rules-could-raise-tax-breaks-cost.
[50] TPC Table T17-0314. The year 2025 is when the law will be fully phased in but before many of its provisions are scheduled to expire. The distribution is roughly similar in Tax Policy Center tables for 2018. The law is even more tilted to the top in 2027, when most of the individual provisions have expired.
[51] Chuck Marr, Samantha Jacoby, and Kathleen Bryant, “Substantial Income of Wealthy Households Escapes Annual Taxation Or Enjoys Special Tax Breaks,” Center on Budget and Policy Priorities, November 13, 2019, https://www.cbpp.org/research/federal-tax/substantial-income-of-wealthy-households-escapes-annual-taxation-or-enjoys.
[52] Chuck Marr et al., “Working Families Tax Relief Act Would Raise Incomes of 46 Million Households, Reduce Child Poverty,” CBPP, April 10, 2019, https://www.cbpp.org/research/federal-tax/working-families-tax-relief-act-would-raise-incomes-of-46-million-households; and Chuck Marr, Yixuan Huang, and Vincent Palacio, ”House Ways and Means Committee Legislation Would Expand EITC and Child Tax Credit,” CBPP, updated July 2, 2019, https://www.cbpp.org/research/federal-tax/house-ways-and-means-committee-legislation-would-expand-eitc-and-child-tax.