IRS examination personnel have decreased by nearly 5,000 employees—or 38 percent—over seven years. IRS revenue officers have decreased by over 1,600 employees, or 42 percent, during the same period.
With fewer officers, the Treasury fails to collect billions of dollars each year. In fact, the chance that any of us will be audited by the Internal Revenue Service has fallen to just one half of 1%.
That’s left a major gap between the amount of taxes owed and those actually collected—an annual gross gap running at about $460 billion, according to IRS estimates.
Treasury and agency officials explained the problem to lawmakers during a meeting of the House Ways and Means Committee on Thursday.
The Gap Favors The Wealthy
This gap furthermore seems to favor the wealthy, who have more resources for tax avoidance. Despite years of blueprints and mandates from Congress and the General Accounting Office on ways the IRS can improve collections and close the gap, “high-income taxpayers have the most opportunity to engage in tax avoidance planning,” said Ways and Means Committee Chairman Richard Neal, a Massachusetts Democrat.
“However, the IRS is not focusing on these [wealthy] taxpayers,” Neal said. “Instead, in 2017, the IRS targeted low-income, earned income tax credit taxpayers.”
He put that question to J. Russell George, inspector general for tax administration at the Treasury Department.
“Many question why the IRS is using its limited resources in this manner rather than deploying them on high-income taxpayers and corporations where the return is greater per hour of a revenue agent’s time,” Neal said.
“Taxpayers are more compliant when they may be audited. But the overall audit rate has plummeted below one-half of 1 percent,” he added.
George responded that if there were more revenue officers, there would be greater collection.
“With 1,600 fewer federal revenue officers from 2010 to 2016,” George said, “we validated that each revenue officer would have been able to bring in roughly $2 million each, which results in $3 billion less revenue annually as a result of the reduction in revenue officers.”
Neal acknowledged that problem, but criticized the agency for failing to strategically use the resources it has.
Since 2010, enforcement staff levels at the IRS have decreased some 40% with the lack of budget increases, hiring freezes and attrition. “Short of replacing this staff, you can only do so much with what you have,” said James R. McTigue, director of tax issues at the GAO, to lawmakers. “If you want to increase the collection rate, which has fallen dramatically since 2010, you have to increase staff.”
ProPublica just published an in-depth look at the IRS’s failings when it comes to taking on uber-rich tax scofflaws: “The IRS Tried to Take on the Ultrawealthy. It Didn’t Go Well.”
Over a decade ago, the IRS released a plan to create a “global high wealth team” whose marching orders were to go after taxpayers earning $10 million or more. The team was never created, and no strategy targeting wealthy taxpayers was implemented, George admitted.
As a backdrop to the hearing, the New York Times released President Trump’s IRS tax returns late last week showing he paid little or no taxes between 1984 and 1994.
Rep. Lloyd Doggett (D., Texas) said: “Of course, it doesn’t help when President Trump, who was shown to have paid no taxes for years, tells the population [in a tweet] that, ‘You always want to show losses for real estate purposes. Almost all real estate developers did. It was sport.’”
“This committee has done its best to ensure that the IRS lacks ability to be a success,” Doggett added.
The IRS’s current budget is $11.5 billion; in real dollars that has dropped by almost $3 billion since 2010, Democrats said.
Not More, Better
Republicans on the committee seemed far less eager to increase IRS funding.
Adding 1,600 new agents and $3 billion annually to IRS collections would amount to just a 1% increase in overall taxes collected, said Rep. Kevin Brady of Texas, the leading Republican on the committee.
“Republicans support closing the tax gap with better customer service; smarter audits; improved IRS assessment of the gap; and capitalizing on our simpler, improved tax code,” Brady said.
The agency must also get more efficient at utilizing data before auditing taxpayers, he added.
“The way that the IRS currently estimates the tax gap comes at a huge personal cost to taxpayers,” Brady said, “requiring significant time, in-person meetings and tons of prep work. If the IRS is going to put taxpayers through that experience, it should outline a strategy on how it plans to use the information, in a timely manner, to close the tax gap.
“You cannot just audit your way out of the tax gap,” he added. “The solutions must be myriad.”
Lawmakers on both sides of the aisle wanted to close the gaps that may exist for the booming gig economy and independent contractors.
Said Brady: "Gig economy workers, such as folks who drive for Uber or use their home as an Airbnb, contribute greatly to our economy. But as [the inspector general for tax administration] recently discovered, there is greater risk of folks who participate in the gig economy of noncompliance.”
George said his office recommended to the IRS that the agency develop a strategic plan to address tax administration in the gig economy. The IRS agreed on its importance, but has yet to follow through or address the issue, he added.