Lawmakers bicker over how to go after tax cheats

Lawmakers are debating President Biden’s pitches to strengthen tax enforcement against high-income individuals and businesses as Congress considers different ways to pay for infrastructure legislation.

Democrats and Republicans both say they want to narrow the gap between taxes paid and the amount owed, suggesting that going after tax cheats could garner bipartisan support as a potential revenue stream.

But Republicans have become increasingly critical of the details in Biden’s proposal, a sign that hurdles remain to reaching an agreement on enforcement.

“We should pursue bipartisan measures to reduce the tax gap and better enforce our tax laws,” Sen. John Thune (R-S.D.), said at a Senate hearing last week. “But any such effort must strike an appropriate balance between taxpayer responsibilities and taxpayer rights.”

Biden has called for providing the IRS with an additional $80 billion over the next decade to ramp up enforcement, update technology and improve customer service at the agency. He has also proposed requiring banks to include new info on account activity in annual reports to the IRS so that the agency can better target its audits.

The administration estimated that its proposals would lead to a net gain of $700 billion over 10 years.

“A robust and sustained investment in the IRS is necessary to ensure it can do its job of administering a fair and effective tax system,” the Treasury Department said in a fact sheet about Biden’s proposal late last month.

Biden said that he wants to beef up tax enforcement as a way to offset the cost of his $4.1 trillion infrastructure and social spending proposals, with other funding coming from higher taxes on the wealthy and corporations.

While the president’s proposed tax increases are a non-starter for Republicans, increased IRS enforcement efforts are one of the few areas where Democrats and Republicans are indicating a willingness to seek common ground.

White House press secretary Jen Psaki on Friday referenced Biden’s IRS proposals when asked about potential avenues for raising revenue other than higher taxes.

“One of the proposals he made was having the IRS play more of a role in ensuring people are paying the taxes they owe,” she said.

Biden on Wednesday met with the top congressional leaders from both parties. Following the meeting, Speaker Nancy Pelosi (D-Calif.) said that increasing enforcement against those who are not paying their taxes was brought up as a potential revenue stream to help finance an infrastructure package.

“Part of the answer is to beef up the IRS so they could take in those taxes,” Pelosi said during a press conference on Thursday. “And that’s a big chunk. That would go a long way.”

But even though lawmakers in both parties want to collect what the government is owed, there are obstacles to getting bipartisan consensus on strengthening enforcement mechanisms.

For starters, Republicans are skeptical that Biden’s proposal would raise as much revenue as he says it would. And while some GOP lawmakers have expressed openness to increasing the IRS budget, they argue that additional funding isn’t likely to resolve tax compliance issues.

“History has shown that simply throwing money at a problem doesn’t necessarily yield a solution,” Sen. Chuck Grassley (R-Iowa), a former chairman of the Senate Finance Committee, wrote last week in an op-ed in the Des Moines Register.

Republicans also have suggested that added reporting requirements for banks would lead to the IRS infringing on taxpayers’ privacy.

“Unleashing tens of thousands of new IRS agents on families, farms and businesses is not the answer, nor is turning the local bank into an IRS chapter that reports on the transactions and withdrawals of Americans’ private bank accounts,” Rep. Kevin Brady (Texas), the top Republican on the House Ways and Means Committee, told reporters Thursday. “That is an intrusiveness that the American people simply won’t stand for.”

The Treasury Department said in its fact sheet that financial institutions would provide the IRS with additional information about account inflows and outflows, without any new burdens for taxpayers.

Sen. Sheldon Whitehouse (D-R.I.) said in a statement to The Hill on Friday in response to GOP concerns that “regular taxpayers have the right to an IRS with the resources and tools it needs to catch wealthy tax cheats.”

The tax gap, while a perennial issue, garnered national headlines last month when IRS Commissioner Charles Rettig told lawmakers that the gap between the amount of taxes owed and the amount paid on time could hit $1 trillion a year. That eye-popping number, well above the official estimates the IRS previously released, prompted bipartisan calls for action, though Republicans are seeking clarification from Rettig about his $1 trillion projection.

Congressional Democrats, unlike their GOP counterparts, are largely supportive of Biden’s proposals for strengthening tax collection efforts.

Democratic lawmakers have long called for increasing the IRS’s budget so that it has more resources for taxpayer services and enforcement. Democrats also support the idea, backed by Biden, to enhance the amount of information that third parties report to the IRS to help the agency check the accuracy of the information that individuals and businesses report on their tax returns.

“Strengthening third-party information reporting would obviously help people file their taxes more easily and more accurately and frankly make it harder for wealthy tax cheats to get away with hiding their income,” Sen. Elizabeth Warren (D-Mass.) said at last week’s Senate hearing.

Warren has said she is planning to introduce legislation in the near future that would provide funding for the IRS, outside the appropriations process, to require that banks provide the IRS with information about account holder balances. Senate Finance Committee Chairman Ron Wyden (D-Ore.) has been working with Warren on the IRS enforcement issue.

The White House earlier this month touted a Washington Post op-ed from five former IRS commissioners who are supportive of Biden’s proposals. Some of the former commissioners said the president’s plan could raise even more revenue than the net $700 billion estimated by the administration.

“I think it’s a very good step,” Charles Rossotti, who served as IRS chief from 1997 to 2002 and co-authored the op-ed, told The Hill. “It’s a broad approach that includes the things that need to be done.”

John Koskinen, another co-author, who served as IRS commissioner from 2013 to 2017, said the question of whether the IRS can effectively absorb an additional $80 billion in funding should be reviewed by Congress but that raising an additional $700 billion from increased funding and reporting requirements “clearly is possible.”

But other former IRS officials echoed some of the concerns raised by GOP lawmakers.

“I am supportive of the administration’s initiative to improve tax administration and secure more funding for the IRS but wary of increasing information reporting at this time,” said Mark Everson, who led the agency from 2003 to 2007. Everson, now vice chairman of the tax consulting firm Alliantgroup, was not a co-author of the op-ed.

Nina Olson, who served as the IRS’s in-house watchdog for nearly two decades, said it’s clear the IRS needs more funds. But she noted that the tax gap is not entirely attributable to the crime of tax evasion, and she expressed concerns that if the entirety of the tax gap is viewed as stemming from tax evasion, that could lead to IRS overreach.

“There’s lots of reasons why people don’t comply with the laws,” said Olson, who now is executive director of the Center for Taxpayer Rights.

“You’re never going to close [the tax gap]. You’re only going to narrow it,” she said.