The tax enforcement agency asked for a return of cut funding to help it collect hundreds of billions in taxes owed but not paid. Some in Congress have acted, but others resisted.
By Peter Cameron, THE BADGER PROJECT
For years, Congress has squeezed the Internal Revenue Service budget, leading to a 24 percent drop in the tax collection agency’s enforcement budget and a 31 percent cut in IRS enforcement personnel.
The results were unsurprising.
From 2010 to 2018, the audit rate for millionaires and the largest corporations, who have complicated tax filings and extensive resources, both dropped by more than 50%, according to a report from the Center on Budget and Policy Priorities, a left-leaning research and policy institute.
And the IRS calculates that hundreds of billions in taxes owed are not collected every year, including more than $1 trillion combined in 2020 and 2021, the most recent years for which those estimates are available.
In 2021, the IRS commissioner told Congress the agency lacked the resources to catch tax cheats.
Most of the unpaid taxes comes from the wealthiest, and from large corporations, he said at that hearing.
Recently, some members of Congress have attempted to reverse those trends.
In 2022, Democrats managed to pass a huge bill called the Inflation Reduction Act, which, according to an analysis by global consulting firm McKinsey & Co., “will direct nearly $400 billion in federal funding toward clean energy, with the goal of substantially lowering the nation’s carbon emissions… and reinvigorating America’s global economic competitiveness, innovation and industrial productivity.”
The bill also seeks to reduce healthcare costs, in part by allowing Medicare to negotiate lower drug prices with manufacturers.
And it gave the IRS an additional $80 billion over 10 years to help it enforce tax collection, especially on top earners, update to modern technology, and provide better customer service, such as fully-staffing help desks to answer tax questions by phone.
That funding bump has since been reduced to $60 billion in negotiated budget deals between the GOP and Democrats, after House Republicans — none of whom voted for the IRA —tried to slash most of the IRS increase.
That $20 billion reduction will reduce tax revenues to the IRS by $44 billion and increase the national deficit by $24 billion, estimates the Congressional Budget Office, which provides nonpartisan analysis on bills to the U.S. House and U.S. Senate.
“That suggests it’s kind of a no-brainer to fund the IRS,” said Ross Milton, a public affairs assistant professor at UW-Madison who researches tax policy. “You’re losing money by doing this.”
The IRS cannot ensure everyone, especially wealthy corporations and rich individuals with their teams of attorneys and accountants, pays what they legally owe if the agency lacks sufficient funding, Milton said.
“We believe in funding law enforcement agencies to enforce other laws to create a safe environment,” he said. “It’s a complicated set of (tax) laws, it’s a complicated economy, and it requires resources to enforce those laws.”
“The vast majority of Americans pay the taxes that they owe. The knowledge that there are some people and some businesses who aren’t paying the taxes they owe should offend you.”
Many on the political right, including the influential Heritage Foundation, rail against increased funding for one of the most unpopular government agencies. They argue that a better solution is to simplify the country’s 6,979 pages of tax code and downsize the IRS, a goal that many across the political spectrum say they share. But a divided Congress has been unable or unwilling to do that.
Republicans have also argued that the funding restoration will result in more audits of middle-class earners. Secretary of the Treasury Janet Yellen has directed the IRS not to increase the rate of audits on that group.
Tax revenues are expected to rise by as much as $561 billion from 2024 to 2034, due to the increased enforcement from the restoration of funds, according to an analysis released in February by the Treasury Department and the IRS.
That bulked-up enforcement can also help states ensure more local taxes owed are being paid, Milton noted.
State agencies like the Wisconsin Department of Revenue don’t have the budget to pursue a lot of tax evaders, he said. But when the IRS does a better job finding untaxed income, states can collect more owed taxes too.
Nationally, the increase in funding has already paid dividends. In July, the IRS announced it had collected more than $1 billion in past-due taxes from high-wealth taxpayers since last fall. And the work continues.
“The vast majority of Americans pay the taxes that they owe,” Milton said. “The knowledge that there are some people and some businesses who aren’t paying the taxes they owe should offend you.”
The Badger Project is a nonpartisan, citizen-supported journalism nonprofit in Wisconsin.
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