Additional IR funding should enable increased tax compliance among high-income families and companies

Recently, the Senate passed the Inflation Reduction Act, which includes funding to help the IRS close the roughly $600 billion annual difference between legally owed taxes and paid taxes —a difference that reflects the absence of tax compliance by high-income people. The idea is to raise $204 billion in funding by 2031, for a net savings of $124 billion, according to the Congressional Budget Office. The bill also provides for more accessibility to health coverage and prescription drugs.

During the 2010s, the IRS budget was drastically cut and remained about 20% below the level at that time after adjusting for inflation. These cuts caused the agency to lose more than a fifth of its staff.

These cuts were even greater in the audit team that takes care of high-net-worth individuals and large companies, having decreased by almost 40%. The result was that the number of audits for these taxpayer tranches dropped by more than 70% and 50%, respectively, between 2010 and 2019.

The Inflation Reduction Act is expected to provide about $80 billion over 10 years for the IRS to rebuild and train its staff and make long-term investments in its computer systems.

This additional budget would also allow the IRS to hire and train audit staff to inspect and analyze large corporations and higher-income individuals.

Due to the complexity of tax returns for high-income taxpayers, audits in these cases are labor intensive. Income from partnerships, for example, involves a complex and multifaceted ownership scheme, which makes it difficult to track individuals. The result is that about 11% of income from partnerships is correctly reported, according to the IRS.

IRS Commissioner Chuck Rettig stated in a recent letter to Congress:

“The resources in the reconciliation package will get us back to historical norms in areas of challenge for the agency — large corporate and global high-net-worth taxpayers — as well as new areas like pass-through entities and multinational taxpayers with international tax issues, where we need sophisticated, specialized teams in place that can unpack complex structures and identify noncompliance.”

Most US citizens have a large part of their source of income from wages and salaries. In this context, employers’ income and payroll taxes originate from their paychecks, which leaves the tax compliance rate for this portion of the population at more than 99%, according to the IRS. Therefore, these taxpayers would not be affected by a possible increase in funding.

The expectation is that with the IRS rebuilt, public confidence in the US tax system will be regained, allowing tax laws to be fully enforced so that all taxpayers can pay what they owe – as well as most companies and people already do voluntarily.

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