BEYOND THE NUMBERS
Plan to Rebuild IRS Would Advance Racial Equity
The economic recovery package Congress is developing should incorporate President Biden’s full proposal to rebuild the IRS. That plan, which includes a large, multi-year funding effort and a critical new information reporting proposal, would advance racial equity by providing more resources to audit high-income filers, who are disproportionately white; improving auditors’ ability to effectively target those high-income audits; and improving services for honest filers.
Deep cuts in IRS funding after 2010 led to sharp reductions in the number of highly trained audit staff needed to audit the largest corporations and highest-income filers, whose returns are the most complicated. This, in turn, has led to a sharp drop in their audit rates, even though filers in the top 1 percent are responsible for a disproportionate share — more than 25 percent — of the $600 billion annual “tax gap” of taxes owed but not paid. These well-off filers are overwhelmingly white due to historical and continuing racial bias and discrimination, which have systematically reduced economic opportunity for households of color.
Its enforcement capabilities weakened by budget cuts, the IRS has focused instead on the simpler returns of low-income taxpayers, who are disproportionately households of color. Today, a low-income person claiming the Earned Income Tax Credit (EITC) is about as likely to be audited as someone in the top 1 percent, even though EITC claims represent just 6 percent of the tax gap. As a result, the most highly audited counties in the country are predominantly Black, rural counties in the deep South.
The Biden plan is designed to correct this inequity.
Its significant funding boost for IRS enforcement and upgraded computer systems would enable the agency to hire and train audit staff who are equipped to conduct the complicated audits of large corporations and very high-income and high-wealth people. While audit rates for high-income filers would rise, “[a]udit rates will not rise relative to recent years for those with less than $400,000 in actual income,” according to the Treasury Department.
The plan also includes another crucial component: new financial reporting rules to help IRS identify unreported income, which would help the agency detect tax evasion and discourage wealthy households and businesses from underreporting their income in the first place. The new rules would require financial institutions to report two new pieces of information — how much money flows into and out of bank accounts held by individuals and companies — on the form they already use to report interest income in these accounts.
The IRS already has income information for people who earn their income through wages and salaries via W-2 forms their employers provide to the IRS. But wealthy people who get the bulk of their income from less transparent sources, such as sales of assets and business transactions, often face no similar third-party reporting on their incomes. The proposal would address that imbalance by providing the IRS with information to help it uncover unreported income for which there is little or no third-party information like a W-2.
Treasury estimates that the Biden Administration’s IRS proposal would generate $700 billion over ten years — $460 billion of it from the new reporting requirements alone. This represents significant revenue that people at the top of the income scale already owe under current law.
As Emory University Professor Dorothy Brown has written, “[p]roviding increased funding for the IRS to conduct audits is a necessary step toward a more equitable tax system. Rich white Americans should pay their fair share of taxes.” That’s why 88 organizations dedicated to promoting social, racial, gender, and economic justice have urged policymakers to “prioritize rebuilding the IRS’s enforcement capabilities and dedicating additional enforcement resources to ensuring wealthy Americans and large corporations pay what they owe.”
More fundamentally, the revenue from reducing tax evasion by the wealthy would help finance other measures in the recovery legislation to expand economic opportunity and security for people with lower incomes and people of color. Strengthening the IRS is part of an overall plan to reduce racial income and wealth gaps from both ends of the spectrum to advance racial equity.
Other elements of Biden’s IRS proposal would also promote racial equity. For example, requiring paid tax preparers, which many low- and middle-income filers use, to meet minimum standards of competency would help ensure that the filers (many of whom are people of color) can access the information and assistance needed to accurately claim tax benefits to which they are entitled.
While some have expressed concern that the information reporting proposal could discourage people of color who are “unbanked” from using financial institutions, that assertion is based on a misleading and incomplete characterization of the proposal, which is designed to protect privacy, to impose no burdens on taxpayers, and to shield low- and moderate-income people from higher audit rates. It further ignores the fact that the economic recovery package creates many new potential pathways for households of color to become banked, including the monthly and fully refundable Child Tax Credit, which can be directly deposited to bank accounts.
Given the relative simplicity and large potential benefits of the Biden Administration’s IRS proposal — including how it would advance racial equity — it deserves the support of both lawmakers and the financial industry, and to be included in any final economic recovery package.