A major piece of President Joe Biden's $1.8 trillion American Families Plan is directing $80 billion to the Internal Revenue Service over the next decade to beef up enforcement and fight tax evasion by corporations and the wealthiest Americans.
"For large multinational corporations that stretch loopholes beyond recognition to book income to offshore tax havens, the line between legal avoidance and evasion may be paper thin," said Sen. Sheldon Whitehouse (D., R.I.) at a Senate hearing on Tuesday. "It may turn on whether an outgunned IRS can defend against the armies of lawyers hell-bent on burying the IRS in litigation."
Biden's plan aims to close the tax gap — the difference between the amount of tax owed and the amount actually paid by taxpayers. In 2019, the IRS looked at tax years 2011-2013 and estimated an annual tax gap of $441 billion, but IRS Commissioner Charles Rettig has said the tax gap could now be as high as $1 trillion.
"There's certainly ongoing debate about how large the tax gap actually is," said Garrett Watson, senior policy analyst at the Tax Foundation. "I think the administration is betting that that gap is much bigger, closer to [Rettig's estimates] which will make it easier to get after the revenue they're looking for."
The Biden administration expects its proposed changes could bring in $700 billion over 10 years, which would help pay for measures in the American Families Plan, like free community college and universal preschool. Administration officials say the increased enforcement will target wealthy individuals, not people earning less than $400,000 a year.
Sen. John Thune (R., S.D.) said on Tuesday Republicans support closing the tax gap, but he suggested the Biden proposals may not raise as much money as the administration hopes.
"It is not to say that better utilized or enhanced resources couldn't help find real money, but let's be straight about the return on investment. Particularly when those figures are portrayed as off-sets for new spending proposals," said Thune in the hearing.
"The stakes here, I think, are fairly high, just because [increased IRS enforcement] is the single largest revenue raiser in the American Families Plan," said Watson. "You're talking about pre-K or free community college or family care programs, unlike the Jobs plan... these are not temporary, they're permanent. So you really do need to have a sustainable form of financing to ensure that they are in good shape for the long run."
Whitehouse — the Chairman of the Senate Finance subcommittee on Taxation and IRS Oversight — said on Tuesday he wants to explore mandatory funding for the IRS, so the agency has "the sustained, predictable support it needs to make long-term investments."
Don Fort, the former chief of the IRS Criminal Investigation Division who spent nearly 30 years at the agency, told Yahoo Finance the emergence of cryptocurrency, new technology and the speed at which money now moves have complicated tax enforcement — and the IRS has struggled to keep up as staffing levels fell due to budget cuts.
Fort noted particularly low staffing levels in the IRS's Criminal Investigations (CI) department when he worked there. "Every year you'd go down hundreds of employees and not be able to plus up at all or even stay even," said Fort, who is now Director of Investigations at Kostelanetz & Fink. "They still, on the CI side, did remarkable work with limited resources."
Last summer, the CBO found the IRS lost 15,000 employees between 2010 and 2018, which led to a decrease in examinations and follow-ups on returns. Over that period, the number of examinations dropped by about 40% as the number of returns grew by 5%.
"If you're an honest taxpayer that files every year timely and accurately, then you should want more enforcement at the IRS because you're paying for everybody else's fair share — for the people that aren't being honest with their taxes," said Fort.
The $80 billion in the Biden plan would go toward hiring, training and overhauling technology — which Fort and other experts say is very outdated.
"Any funding for the IRS has to include that full technology funding so it can get up to speed, like other financial institutions," said Fort.
Biden's plan would also require financial institutions to report annual account inflows and outflows to the IRS — aimed at helping the agency find unreported income among high-earners. Some critics have raised privacy concerns about the increased reporting requirements.
"Many Americans are understandably concerned about the risk fo government overreach. They're concerned their local banks could turn into extensions of tax enforcement on behalf of the IRS," said Thune, the top Republican on the subcommittee. "While we should look at ways to improve reporting, the IRS should better use information it already receives."
While Republicans may support some efforts to close the tax gap, Thune said $80 billion is too much money.
"Any increase to the agency should come with commensurate accountability and transparency," he said.
Both Watson and Fort stressed that even if Congress approves all $80 billion of Biden's plan, it will take some time to significantly improve enforcement.
"You really need a 10-year rebuilding program. You can effectively put the right people out there to do the recruiting. The recruiting and the screening takes a long time, and not just on the CI side —but all of these IRS positions. A lot of them are very technical," said Fort. "You have to take some of your existing people offline to do that, and then the training and then the on-the-job training."
Watson told Yahoo Finance the new reporting requirements might not immediately lead to additional revenue.
"You have to be able to make that data — and it might be a significant amount of data — useful," said Watson. "In the short to medium run, if the IRS doesn't have the talent or the technological capacity to do that, it could be... a lot of useless data that's being reported."
Jessica Smith is chief political correspondent for Yahoo Finance, based in Washington, D.C. Follow her on Twitter at @JessicaASmith8.