Now that the Senate has approved Biden’s $3.5 trillion spending bill, the tough work of fleshing out the budget’s reconciliation instructions begins. A core part of that effort will be the president’s 10-year plan to fund the IRS. Far from growing the IRS to unprecedented size, it will only partially restore it to its historic capacity and is essential to improve service and shrink the massive and growing tax gap.
For nearly 40 years, Congress and Republican and Democratic administrations alike have starved the IRS. Incredibly, an IRS Funding Plan Analysis by Fred Forman of Shrink the Tax Gap shows the IRS budget today is only 49 percent the size it was relative to the economy in 1993. If the administration’s funding proposal is adopted, by the year 2031, it shows the IRS budget will still only be 75 percent of the proportion of the economy that it was 38 years ago.
People love to hate the IRS, but decades of budget cuts have been incredibly counterproductive. The same analysis reveals since 1993, the number of IRS employees has fallen by 33 percent while business returns have increased by 84 percent and individual returns have risen by 38 percent.
That’s why only 2 percent of taxpayer phone calls to the IRS help line were answered in the recent filing period and the tax gap — taxes owed but not paid — was $574 billion in 2019 and will grow to $7 trillion over the next ten years. That’s more than all the income taxes paid by 135 million individual taxpayers.
Honest taxpayers suffer twice. They incur cost and wasted time dealing with the IRS and they will shoulder the tax burden — now and in the future — to make up for the minority of mostly upper income taxpayers who are not paying what they owe.
This is not fair, efficient, or sustainable. And it’s just a back door tax increase on honest taxpayers.
What about that headline of an $80 billion budget increase? How can the IRS, a federal agency with a $13 billion annual budget, absorb that much money? That $80 billion number seems high but it is a cumulative amount spent over 10 years. That works out to a 6 percent annual real increase over its current budget.
Based on my 50 years of business, including five years as IRS commissioner, I am confident that the proposed funding can be spent wisely and efficiently if it is provided steadily over a decade.
Restoring funding, while absolutely essential, is only part of the solution. Improving the IRS’s adoption of 21st Century technology is the other piece. In the past three decades, the economy has become far more complex, but the IRS’s technological capability hasn’t kept up, enabling the tax gap to grow unabated.
Why is the tax gap so large? Because the income of everyday workers is reported on forms like W-2s, and the vast majority of the tax on that income is paid. But much business income, such as that which comes from partnerships, is invisible to the government. The IRS estimates that more than 50 percent of this income is not reported and taxed properly. Meanwhile, the analysis shows income from partnerships is comparable to that of all corporations. That growth in underreported business income is the biggest source of the tax gap.
As Congress considers raising taxes on those who already pay what they owe, it is even more important to reduce the unfair burden imposed by bad service and a massive tax gap. The Biden plan to fund the IRS is a national imperative and I strongly urge Congress to embrace the letter and spirit of the recently-passed budget as it drafts legislation related to the IRS.
Charles Rossotti served as IRS commissioner during the Bill Clinton and George W. Bush administrations.