IRS chief warns of unpaid taxes hitting $1 trillion

IRS Commissioner Charles Rettig told lawmakers on Tuesday that the annual “tax gap” between the amount of taxes owed and the amount paid on time could hit $1 trillion a year, prompting bipartisan calls for action.

The figure is much higher than the agency’s previous estimates, and lawmakers on both sides of the aisle at the Senate Finance Committee hearing signaled a willingness to take steps toward narrowing the gap. 

The focus on unpaid taxes comes amid a debate over how to pay for President Biden’s $2.25 trillion infrastructure package. The White House is pushing for an increased corporate tax rate, in addition to stepped-up enforcement of collecting taxes from companies. Biden’s recent budget proposal for fiscal 2022 seeks more than $1 billion in extra funding for the IRS.

The IRS released estimates in 2019 that put the average annual tax gap, from 2011 to 2013, at $441 billion. The agency is expected to issue another estimate next year. 

Rettig said Tuesday that the IRS’s previous estimate did not focus on cryptocurrencies and income from foreign and illegal sources. He also mentioned a report published last month by IRS researchers that estimated collecting all unpaid taxes from taxpayers in the top 1 percent of income would raise $175 billion in annual revenue, a study that focused on income from pass-through businesses and offshore income. 

“If you add those in, I think it would not be outlandish to believe that the actual tax gap could approach and possibly exceed $1 trillion per year,” Rettig told senators.

Rettig, a Trump appointee whose term ends in 2022, said that much of the tax gap can be attributed to high-income individuals and corporations. He said the IRS needs to take a “multifaceted approach” to make a significant reduction in the tax gap. More funding and legislation that imposes new tax reporting requirements would help, Rettig added.

Sen. Ron Wyden (D-Ore.), who became chairman of the Senate Finance Committee earlier this year, indicated that addressing the tax gap will be one of his top priorities in his new post. He called Rettig’s estimate of a $1 trillion annual gap “jaw dropping.”

Republicans have generally opposed Democrats’ proposals to raise federal revenue through tax increases on corporations and wealthy individuals. But during Tuesday’s hearing, many Republican senators expressed interest in ensuring taxpayers aren’t able to avoid paying money they already owe. 

“If there are those that are cheating on their taxes and causing us to have such a large tax gap, which I don’t doubt, we should address that,” said Sen. Mike Crapo (Idaho), the top Republican on the Finance Committee.

Wyden said he and Crapo have been discussing ways to reduce the amount of uncollected taxes in a bipartisan way, a necessary approach if they hope to get legislation passed in the 50-50 Senate. 

“My hope is, on the basis of the number of members who brought this up this morning, we can have an aggressive, proactive effort that reflects the seriousness of this,” Wyden said. “We have big debates about all kinds of future tax policy. How about telling people that we’re really serious about going after the cheaters who are figuring out ways to not pay their taxes when millions of law-abiding Americans are.”

The IRS is not expected to be able to completely close the tax gap, but Rettig said modernizing the agency’s systems could certainly make a dent.

“The key priorities would be to modernize our system, onboard enforcement personnel,” he said. 

The IRS saw its budget slashed significantly in the early part of the last decade amid harsh criticism of the agency from GOP lawmakers. It has seen some small budget increases in recent years, but the agency’s funding level is still significantly below its 2010 peak when accounting for inflation.

Those budget cuts have led to a workforce reduction and a decline in audit rates. Rettig said the agency has 17,000 fewer enforcement personnel compared to a decade ago and that additional staffing would lead to higher audit rates. 

Biden’s budget proposal calls for an increase in base IRS funding of $1.2 billion, or 10.4 percent, compared to the enacted level for this year. It also calls for an additional $417 million for enforcement as part of a multiyear initiative. Wyden called Biden’s proposal a good first step. 

Several senators on Tuesday said they were working on legislation aimed at boosting collection of taxes owed.

Sen. Rob Portman (R-Ohio) said he’s working on a bill that would define cryptocurrency for tax purposes and provide reporting rules related to virtual currency.

Sen. Elizabeth Warren (D-Mass.) said she is working on legislation to provide the IRS with additional funding on an ongoing basis that’s on top of what the agency receives through the annual appropriations process. The measure would also increase third-party reporting requirements, similar to how third parties already provide information to the IRS about income from wages and interest.

Wyden said he appreciated the ideas suggested by other lawmakers. 

“A number of my colleagues brought up constructive ideas for getting that money from the cheaters into the government’s coffers,” he said.