The Treasury Department estimated that the gap between taxes owed and taxes paid on time was about $600 billion in 2019 as it provided more details on Thursday about President Biden’s plan to strengthen IRS enforcement.
The tax gap could total $7 trillion over a decade if left unaddressed, Treasury said in a report.
Treasury’s estimate comes amid a discussion of the size of the tax gap and a debate among policymakers about how best to shrink it.
Biden has proposed providing the IRS with $80 billion over a decade and increase reporting requirements for banks in an effort to reduce the tax gap. The administration has estimated that these proposals would raise on net about $700 billion in its first decade and that revenue could be used to help pay for Biden’s infrastructure proposals.
Democrats have praised Biden’s proposals. Republicans also have said they want to shrink the tax gap, but have expressed concerns about the amount of funding money Biden is proposing and are worried that the increased reporting requirements could infringe on taxpayers’ privacy.
Treasury said that its $600 billion estimate of the tax gap is extrapolated from the IRS’s official estimate, released in 2019, that the average annual gross tax gap was $441 billion from 2011 to 2013. The department said its estimate suggests a voluntary compliance rate of about 84 percent, which is consistent with the rate since the 1970s.
IRS Commissioner Charles Rettig has estimated that the tax gap could be even higher than the agency’s previous official estimates, and could reach $1 trillion annually.
He told lawmakers last month that the agency’s official estimates don’t account for cryptocurrencies and income from foreign and illegal sources. Treasury’s report notes that some researchers think that the official tax gap estimates are understated because they don’t fully account for sophisticated tax evasion.
Treasury’s report provides further information about Biden’s IRS plan. The department said that the president’s proposals would shrink the tax gap by about 10 percent, and that the plan would raise even more revenue — $1.6 trillion — in its second decade following enactment.
“While it will take time and substantial effort to achieve these goals, even modest progress would translate into a substantial increase in revenue,” the report said.
Treasury also said that Biden’s plan would make the tax system more fair, since the tax gap disproportionately stems from high-income taxpayers. The report said that Biden’s plan will focus on combating tax evasion by high-income individuals, and that audit rates won’t increase relative to recent years for taxpayers with income under $400,000.
“The fairness and progressivity of the tax code can be enhanced through more equal compliance rates that ensure those with high incomes pay what they owe,” Treasury said in its report.
Treasury said that Biden is proposing to provide the IRS with $72.5 billion over a decade in mandatory funds, as well as another $6.7 billion in appropriations to “program-integrity” activities that are estimated to save more taxpayer dollars than they cost. The mandatory funds would lead to an increase of about 82,000 employees over a decade, and the program-integrity funding would result in another 5,000 in additional staff.
The increases in IRS funding would be phased in over a decade, so that increases in the agency’s budget and staffing levels would grow at “manageable” rates, Treasury said. The IRS budget would grow at about 10 percent per year, while the agency’s workforce would increase by no more than 15 percent annually.
“By the end of the decade, however, the IRS’s budget would be roughly 40% above 2011 levels in real terms as a result of this proposal,” Treasury said.
Treasury said that the $80 billion in funding would raise about $320 in additional revenue, or $240 billion on net. The report suggests that this estimate is conservative because it only focuses on revenue raised from enforcement investments, and not also revenue raised from improvements to IRS technology and taxpayer services that are likely to boost compliance with tax laws.
Treasury also said that Biden’s proposal to increase the amount of information that banks and other financial institutions report to the IRS on existing forms about financial accounts would raise $460 billion. Foreign financial institutions and cryptocurrency exchanges would be required to report information about account activity under this regime, the department said.
Additionally, businesses would have to report receiving cryptocurrency with a fair market value of more than $10,000, similarly to how they currently report cash transactions, according to the report.
Updated at 12:35 p.m.