IRS Says $1 Trillion in Taxes Are Left Uncollected Annually
IRS Commissioner Charles Rettig announced on April 13, 2021, that the U.S. government is losing $1 Trillion in unpaid taxes annually. He claims the IRS needs more and consistent funding to hunt down tax cheats.
He further told the Senate Finance Committee that the difference between taxes legally owed and those actually paid has grown since the last estimate — which was $441 billion annually between 2011 and 2013. That difference is called the “tax gap.” The difference between the 2011-13 tax gap numbers and the current one is due in part to new developments, like virtual currency.
His concerns center around the trading of cryptocurrencies, which have been escaping taxation, as well as more and more foreign acquired income and business income being passed through as personal income. “If you add those in, I think it would not be outlandish, that the actual tax gap could approach, and possibly exceed $1 trillion,” he said.
He also said that according to a recent IRS study about the top 1% of taxpayers, “collecting all unpaid federal income tax from this group would increase federal revenues by about $175 billion annually.” This estimate is conservative by some measures, as the study looked at only off-shore income and pass-through entities.
Rettig pointed out that years of budget cuts have left the IRS with about 17,000 less revenue enforcement staff than they had ten years ago. He also noted that tax avoidance schemes are becoming increasingly sophisticated. When Sen. Ron Wyden (D-OR), the Senate Finance Committee’s chair, asked what the IRS would do with more money, Rettig said that $1 billion would help add 4,875 enforcement personnel.
And about those sophisticated tax avoidance schemes: an entire industry has sprung up around them. It’s a “wealth defense industry” aimed at helping rich folks hide their assets.
During the hearing, many Republican senators voiced approval of making sure taxpayers aren’t able to avoid paying money they owe. Republicans have generally opposed any Democratic proposals to levy tax increases on corporations and wealthy individuals to raise federal revenue, but this issue crossed party lines at the hearing.
Senator Mike Crapo (R-ID) said, “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.”
Wyden and Crapo have been working on developing a bipartisan approach to reducing the amount of uncollected taxes. Said Wyden, “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. 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.”
President Biden’s fiscal 2022 budget request would give the IRS an additional $1.3 billion, 10.4% more than it currently gets. The proposed IRS budget is $13.2 billion, which includes an additional $900 million for tax enforcement in 2022. That fiscal year begins October 1.
Natasha Sarin, a Wharton School economist who is an expert on the tax gap, has been hired to focus on the Treasury’s priority: closing that gap.
The gap comprises underpayment or nonpayment of taxes, underreported income, and exaggerated tax breaks.
Of the $441 billion in unpaid taxes for that three-year period in 2011-13, the IRS collected $60 billion annually through enforcement. Rettig said that figure didn’t include cryptocurrency or much from foreign and illegal source incomes.
Wyden said, “Wealthy tax cheats have proven that with enough attack-dog lawyering, they can litigate the IRS into submission and rip off working taxpayers for big money. Meanwhile, the burden of tax audits was shifted unfairly to working people. That’s because it’s a lot cheaper and easier to hassle a working mom over a tax credit over repayment than it is to decipher the latest money laundering schemes.” He further said, “The fact is that nurses and firefighters have to pay with every paycheck and so many highfliers can get off."
Rettig claimed of the IRS, “We do get outgunned.” He suggested requiring transactions in cryptocurrencies to be reported, much like securities transactions are reported on 1099 forms. Such reports would help the IRS capture capital gains on regulated cryptocurrency investments. He also suggested more electronic tax return filing and more careful regulation of tax return preparers.
Sen. Rob Portman (R-OH) is working on a bill to define cryptocurrency for tax purposes and that would create reporting rules for virtual currency.
Sen. Elizabeth Warren (D-MA) is working on legislation to give the IRS additional ongoing funding on top of what the agency receives annually through appropriations. Her plan would increase third-party reporting requirements.
Wyden said, “A number of my colleagues brought up constructive ideas for getting that money from the cheaters into the government coffers.”
According to Rettig, as of July 1 a portal will be opened for low-income Americans to sign up to get monthly payments of an expanded Child Tax Credit from Biden’s COVID-19 relief package. This temporary monthly payment system will cost about $391 million and require 300-500 people to run.
A Congressional Budget Office report indicates that if IRS funding for collections and examinations is expanded by $20 billion, then over ten years revenues would increase by $61 billion. This would reduce the deficit by $41 billion. If $40 billion were added to the IRS’s funding, revenue collections would be increased by $103 billion. A different report from the Treasury said that every dollar given to IRS enforcement would have a 6-1 return on investment ratio.
Most recently, President Biden has announced his intention to get $80 billion directed to the IRS to enforce tax collections on high-earners.
