The Helmsman hasn’t fared very much, and Democrats want to fix that with a key element of the newly passed Anti-Inflation Act. Republicans warn that this is truly an attack on the American working class, which Democrats want to forget.
Normal working people who pay their taxes shouldn’t fear a stronger IRS. Democrats are trying to close the tax gap, the amount of tax Americans owe but don’t pay each year, for a variety of reasons. They could be hiding revenue. There could be honest disagreement about what actually counts as income. It could be simple mistakes. Whatever the reason, the tax gap is huge. Estimates range from an annual tax gap of $280 billion to $1 trillion. Closing the tax gap completely would generate far more revenue than all the tax hikes President Biden has tried and failed to do.
It is very difficult for professionals who derive most or all of their income from work, as most people do, to dodge their taxes. Your employer is required to report your income to the IRS and withhold taxes, so there can be little dispute over how much you earn and how much you owe. Taxpayers can claim deductions, but there’s little room for creative accounting when your income is from a single source and you’re an employee rather than a businessman. The IRS estimates that only 1% of workers who fill out a W-2 form misstate their income.
It’s easier to defraud the IRS when you’re rich
Wealthy filers have far more opportunities to cheat, and they do. The rich earn much more of their income from investments, rental income, business profits, and other sources where reporting to government is indirect or non-existent. Tax attorneys and accountants have many ways to hide income for the rich, such as: B. Offshore accounts and shell companies. Income underreporting increases based on how “opaque” or difficult to track the source of income is. The IRS estimates that 55% of the most opaque receipts go unreported, costing the Treasury Department hundreds of billions in lost revenue each year.
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The IRS is struggling to catch tax dodgers because Republicans, who controlled the 2017-2021 presidency and Congress for several years before that, have consistently tampered with the agency’s budget. The IRS’s budget has shrunk by about 20% over the past decade, leaving it short of accountants, support staff and modern computers. A recent disclosure by the Washington Post describes the outdated manual processes the IRS is forced to use because its software and hardware are decades old. Some systems were made by companies that are no longer in business. Audit rates have fallen 64% among the wealthiest Americans and 50% among the largest companies since 2010.
The Inflation Reduction Act, which Biden signed into law on Aug. 16, will provide the IRS with $80 billion in additional funding over the next decade. The agency says it will use that money to hire thousands of new employees, upgrade its technology and improve customer response times.
Republicans are hysterical. “Are you making $75,000 or less? The Democrats’ new army of 87,000 IRS agents will come for you,” House Minority Leader Kevin McCarthy tweeted Aug. 9. A group of House Republicans claim that ordinary law-abiding workers face 710,000 new IRS checks. The Wall Street Journal editorial page laments a new “IRS audit wave” hitting the middle class. All of these claims are making the rounds in the conservative media.
Are the Democrats really dumb enough to use their narrow majority in Congress to harass middle-class voters with unnecessary tax audits that will yield little revenue? If they are, they deserve to be ousted from office and probably will be.
The IRS needs to target big fish
Here’s what is likely to happen instead: The IRS will gradually increase its staff and overhaul its antiquated technology. It will take time. Labor shortages could hamper hiring, and upgrading government computer systems is notoriously difficult. Perhaps in a couple of years the $80 billion investment will start to show a positive return, which can only happen if the IRS takes aim at big fish. The Congressional Budget Office estimates that $80 billion in additional funding could result in $200 billion in additional tax revenue over a decade, which translates to a 250% return on investment. Other estimates put the possible turnover at up to 700 billion US dollars.
If it wanted to, the IRS could make foolish use of these new resources. It could prey on low- and middle-income Americans who earn some or most of their income in cash, since underreporting cash income is a way to avoid taxes. It could also be looking for low-income workers claiming the earned income tax credit because some of these claimants make mistakes in their tax returns and inadvertently understate their income.
But that would be extremely stupid at a time when Americans distrust the government and one of the two political parties is openly hostile to the agency, whose job it is to collect federal tax revenues. Republicans will be on the lookout for this type of bad targeting and will trumpet any case they can find. Political activists will invent false outrage stories about government thugs torturing humble citizens.
The disinformation is already flowing. These “87,000 new IRS agents” aren’t exactly the army of tax baiters that Republicans say they will be. The IRS could hire that many people over the next 10 years, but many of them would replace at least 50,000 IRS employees who are retiring. Only part of the new hires would be accountants. Others would work in engineering, support, or other departments. Some can help clear the huge backlog of unprocessed tax returns, allowing Americans who receive a refund to get their money faster.
Nor will there be 710,000 new audits by working-class Americans. This figure comes from carefully selected data and flawed assumptions tweaked to predict a tax agency rampage. PolitiFact classifies the claim as “largely false.”
Treasury Secretary Janet Yellen, whose department oversees the IRS, said in an Aug. 10 letter to the IRS commissioner that new resources “must not be used to increase the proportion of small businesses or households below the $400,000 threshold, which are checked against historical levels. Instead, enforcement resources will focus on high-end violations.” Yellen argued that better technology and data processing should allow the agency to avoid targeting the wrong people and more effectively identify the most likely fraudulent filers.
Could she be lying? Um, okay, sure. But why? It would be self-destructive for the IRS to harass low-income taxpayers who don’t have much money to begin with while continuing to let off the hook wealthy tax evaders. Their reputation would be for the worse if that were possible, and the backlash would be brutal in both political parties, leaving the agency without a defender.
What the IRS should, and almost certainly will, do is use the new resources to see where the money is: at wealthy filers and large corporations that sit on most of the unreported earnings. Congress and outside regulators should be careful that the IRS uses these new resources to improve tax compliance where it matters most. If it works, it should make the tax system a little fairer and maybe even improve trust in government a little. The helmsman should only be your enemy if you beat him up.
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