IRS enforcement is trashed.
Huang ’20 [Chye-Ching; February 11; Senior Director of Economic Policy of the Federal Fiscal Policy Team at the Center on Budget and Policy Priorities, LLM from Columbia Law School, Bachelor of Commerce in Economics from the University of Auckland; Center on Budget and Policy Priorities, “Depletion of IRS Enforcement Is Undermining the Tax Code,” https://www.cbpp.org/research/federal-tax/depletion-of-irs-enforcement-is-undermining-the-tax-code]
There is, however, promising bipartisan recognition that IRS enforcement funding is too low, and that the revenue gains from added enforcement funding would more than offset the cost. Lawmakers can build on this to restore adequate funding for the core government function of collecting taxes owed under law. Lawmakers should also pursue meaningful tax reform that strengthens the integrity of the tax code, raises revenue, and boosts workers’ and families’ incomes.
IRS Enforcement Severely Depleted
Figure 1 summarizes the impact of the deep cuts to IRS funding since 2010:[1]
IRS funding overall has been cut by 21 percent in inflation-adjusted terms.
IRS enforcement funding has been cut by 24 percent in inflation-adjusted terms, even as the number of tax returns has grown by about 9 percent.[2]
The number of operations staff has fallen by 31 percent, and the number of revenue agents with the expertise to conduct audits of complex returns has fallen by 35 percent.
The audit rate overall has fallen by 45 percent, from 0.9 percent to 0.5 percent.[3]
The audit rate for corporations with more than $1 billion in assets is down 51 percent.
The audit rate for filers with more than $1 million[4] in annual income is down 61 percent.
These trends have significant implications for efforts to address the tax gap. Each year an estimated $441 billion in federal taxes owed is not paid voluntarily and on time. Underreporting of tax liability accounts for 80 percent of this gross tax gap; the other 20 percent reflects failure to file a return or failure to pay the tax reported on returns on time and in full.[5] The IRS recovers about 14 percent of the gross tax gap through enforcement efforts and other late payments, leaving a net tax gap of $381 billion.
The steep decline in audits for high-income individuals stemming from IRS underfunding means that low- and moderate-income households claiming the Earned Income Tax Credit (EITC) are now audited at roughly the same rate as the top 1 percent of filers, even though the former are responsible for less than 10 percent of the tax gap due to underreporting while the latter may account for as much as 70 percent.[6]