We're just a few weeks into 2023 and Washington’s lawmakers have come out swinging.
After a days-long speaker standoff, Republicans in the House have moved on to their next priority: clawing back funds from the IRS.
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President Joe Biden had included increased funding for the IRS in the Inflation Reduction Act to help the agency catch sneaky tax evaders — especially those high-earners who love to find loopholes. Advocates believe the increased funding could raise as much as $1 trillion by forcing tax cheats to pay their dues, especially after years of budget cuts have gutted the system.
But on Jan. 9, Republicans introduced and passed a bill to rescind that $80 billion in funding.
While it’s likely to be struck down by the Democrat-controlled Senate, and Biden’s office has already voiced his intentions to veto "this reckless bill" if it makes it to his desk, it’s still a strong statement from Republican lawmakers.
Meanwhile, at the center of this political football is an overworked and understaffed tax agency. And whoever wins the power struggle in Washington, experts say taxpayers could be the ones left holding the bag.
The IRS desperately needs the support
The plan for the $80 billion in funding spread over the next 10 years, is to help the IRS modernize its infrastructure, improve enforcement and replace its aging workforce (50,000 of the IRS’s 80,000 workers are expected to leave or retire in the next five years).
A Treasury Department report from May 2021 estimates the extra money would allow the agency to hire around 87,000 new employees — which could include revenue agents, customer service and IT staff — by 2031.
Bogged down by a backlog that includes millions of unprocessed paper filings and a processing system that’s more than half a century old, the IRS has been in need of more resources and support for a while.
The agency has reportedly been underfunded by about 20% for a decade — leading it to cut back on both staff and technology updates.
The customer service department has been short-staffed as well. During the 2022 filing season, the IRS received around 73 million phone calls from taxpayers — but only 10% were actually answered.
"The combination of more than 21 million unprocessed paper tax returns, more than 14 million math error notices, eight-month backlogs in processing taxpayer correspondence, and extraordinary difficulty reaching the IRS by phone made this filing season particularly challenging," national taxpayer advocate Erin M. Collins wrote in her 2022 midyear report to Congress.
On top of these issues, former IRS Commissioner Charles Rettig estimated in 2021 that the agency was losing $1 trillion in unpaid taxes each year — particularly due to evasion from the rich and big businesses. He also indicated they could be slipping through the cracks in part due to the lightly regulated cryptocurrency market, foreign source income and abuse of pass-through provisions.
Rettig has long pushed for increased funding “to bring on the fire-breathing dragons” to take cheaters to task.
Could bolstering enforcement do more harm than good?
Supporters argue the funding will help close the “tax gap” by helping catch more evaders.
From the total $80 billion, $45.6 billion has been allotted for increased enforcement — which would go toward hiring more enforcement agents, providing legal support and investing in “investigative technology” to determine who should or shouldn’t be audited.
But not everyone is thrilled with the news.
“They’re not going to get this ‘magic money,’” Brian Reardon told Bloomberg. Reardon is the president of the S Corporation Association, which represents small, privately-owned businesses that pass taxes onto their shareholders.
“If you dial up enforcement on people who are otherwise following the rules and paying what they owe, you create resentment and anger. You undermine people’s confidence in the tax system.”
However, the Biden administration maintains that the increased enforcement will be focused on the ultra wealthy and large corporations, and isn’t intended for small businesses or households who earn less than $400,000 a year.
Research from the Department of Treasury indicates that the top 1% of Americans could be dodging as much as $163 billion in taxes each year.
That being said, if the increased budget is approved, Eli Akhavan, a partner at Steptoe & Johnson in New York, says he expects audits will go up. But he’s been telling his wealthy clients they “have nothing to worry about other than some headaches,” provided they’re following good advice and have their “ducks in a row.”
“If there’s nothing to find, there’s nothing to find,” Akhavan says.
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