President Joe Biden sees a better funded, more aggressive IRS an important part of his plan to get companies to pay the roughly $ 2.25 trillion cost of his infrastructure program.
A proposed funding boost for the agency would go hand in hand with a broader enforcement initiative announced in the coming weeks to tackle tax evasion between businesses and high-income individuals, the administration said in its plan on Wednesday. The increase in enforcement is one of several corporate tax changes proposed to offset the cost of planned investments in highways, bridges, clean energy infrastructure, and other infrastructure projects.
The plan reinforces the recent bipartisan dynamic on Capitol Hill to increase the IRS budget. It is a reversal of years of budget cuts that have resulted in the loss of more than 20,000 employees since 2010 and affect the agency's ability to perform core functions, including audits.
Audits of returns submitted by the richest individuals and companies in the United States have dropped dramatically. For example, the IRS examined approximately 56% of the 2015 returns submitted by companies with assets of $ 20 billion or more, compared to nearly 85% of the 2010 returns, according to agency statistics. The IRS recommends using the 2015 data as it typically has three years to review a tax return after it is filed, meaning that more recent data is not complete.
The administration has not yet stated how much it will invest in the agency or whether there are any conditions attached to the funding. The White House is expected to release initial fiscal 2022 spending requests soon, signaling the administration's priorities for implementation by the Congressional appropriators.
Former IRS Commissioner John Koskinen warned against either mandating a certain increase in the number of audits or staff focusing on high-income individuals and companies. Instead, he said the agency's enforcement resources should generally be increased, with instructions to apply them first to audits of companies and high-income individuals that the agency intends to conduct but has not done due to budget constraints.
Leftover resources should generally be used for overlooked audits. This would make it clear that individuals and companies are being screened for problems with their return, not for themselves, Koskinen said.
Guinevere Moore, an executive member of Moore Tax Law Group LLC, agreed that mandatory exam levels or quotas can be harmful and compared them to police ticket quotas that can result in people being run over even if they don't do anything wrong do.
"It's not an effective enforcement tool. It's not an effective deterrent tool," she said.
Return on investment
Research shows that investing in IRS enforcement can increase government revenues, but they differ in varying degrees.
IRS Commissioner Charles Rettig previously said the agency was bringing in $ 5 to $ 7 for every dollar spent on enforcement.
Natasha Sarin, who recently joined the Treasury Department's Economic Policy Office as Deputy Assistant Secretary for Microeconomics, wrote a paper with former Treasury Secretary Larry Summers in 2019 arguing that an increase in the IRS budget by $ 100 billion would be beneficial would make about $ 1.15 trillion over the next 10 years. The Congressional budget bureau was more conservative, predicting that a $ 20 billion investment in IRS exams and collections would raise $ 61 billion over 10 years.
According to an estimate by Don Schneider, a former Republican chief economist on the House Ways and Means Committee who is now a policy researcher at Cornerstone Macro, Biden's infrastructure package could add $ 677 billion to deficits over 10 years. That deficit could decrease because Schneider's estimate does not yet include revenue generated from proposed increases in IRS enforcement funding or changes to the international tax structure – an area particularly difficult to forecast. The administration has not yet published detailed plans for these areas.
Despite the increase in the deficit, Democrats could use a quick maneuver known as budget balancing to move the package along party lines if infrastructure spending ceases after eight years and revenues are higher after ten years, as Biden said in his report suggested outline. The administration's claim that the plan will be paid for in full within 15 years is more of a political argument than something required for the procedure to work.
"I don't think they feel the need to say over a 10-year period that this is being paid for," said Schneider. "Biden's agenda itself, which he proposed during the campaign, was never paid for in full."