The Democrats probably can’t run their Presidential campaign on “Make the IRS great again”, but Bernie Sanders is done running, probably, so he can raise the issue of the IRS being starved for resources particularly in the enforcement area. His office issued a release about a Congressional Budget Office report that he commissioned from his perch as the Senate Budget Committee Ranking Officer.
“The richest 1% is responsible for 70% of all unpaid taxes,” said Sanders. “With the money that these tax cheats owe, this year alone, we could fund tuition-free college for all, eliminate child hunger, ensure clean drinking water for every American household, build half a million affordable housing units, provide masks to all, produce the protective gear and medical supplies our health workers need to combat this pandemic, and fully fund the U.S. Postal Service. That is an absolute outrage, and this report should make us take a long, hard look at what our national priorities are all about”
I’m skeptical that we can get all that from enhanced enforcement. Nonetheless, the report makes a good case for spending more on the IRS.
The Tax Gap
The report analyzes what is known as the tax gap.
“The IRS periodically estimates the tax gap using a variety of methods, including data from its examinations of tax returns, statistical models, and comparisons of the returns filed by taxpayers to external data or actual receipts.”
The numbers on that are from 2011-2013. There is a gross tax gap of $314 billion which is based on what people voluntarily report and pay. Enforcement activity brings that to a $271 billion net tax gap. Of course it is hard to know how accurate that estimate is.
There are some really shocking revelations in the analysis. People whose income is subject to third party reporting are less likely to understate there income. I mean who knew?
You Need People
Another amazing revelation is that enforcement takes people.
“Three main types of employees are involved in examinations. Tax examiners conduct correspondence examinations for individuals and small businesses. They are trained by the agency to examine a limited range of tax topics. Tax compliance officers conduct limited-complexity, in-person examinations at IRS offices. Revenue agents conduct extensive, in-person field examinations at a taxpayer’s home or place of business.
The two main types of collections employees are contact representatives, who handle taxpayer queries about automatically generated notices from the Automated Collection System, and revenue officers, who contact taxpayers that have not responded to notices”
And budget cuts have meant that there are fewer people. The drop since 2010 is quite dramatic. From 2010-2018, the IRS reduced enforcement employees by 15,000. That means fewer audits and less collection activity.
You can dig further into the report for more of the details. It is not exactly rocket science.
Return On Investment
The key bit of analysis in the report are the estimates of what the return would be on substantial increases in IRS funding. The estimate is that $20 billion spent over the next 10 years (It would be phased in) would produce $61 billion in additional revenue. $40 billion would produce $103 billion.
There is quite a bit of discussion of how it might work noting that enforcement and avoidance is something of an arms race.
“Although CBO’s estimates start with the IRS’s calculations of the revenue it would collect per dollar of enforcement spending, CBO made two adjustments to better approximate the marginal return on that spending. The first is an adjustment for taxpayers’ learning. After the third year of an initiative, CBO judges that taxpayers will have adapted to a new enforcement activity and developed ways to evade that enforcement. CBO therefore reduced the marginal return on each activity after the third year.”
The Sanders release sums it up this way.
“The new CBO report also found that increasing IRS funding by just $20 billion over the next 10 years would actually decrease the deficit by $40 billion over the next 10 years. This estimate is conservative since it does not include the considerable indirect impact that increased funding would have on deterrence.”
Think Outside The Box
Most tax professionals probably would favor a stronger IRS. As long as it focused on the other guy’s clients. And then of course there are the people like Lance Wallach whose business is dependent on there being some enforcement activity.
A lot of us try to do things right and it is frustrating to realize that it might not matter all that much, which gives me the inspiration for how to ramp the IRS more effectively.
Revolve The Door The Other Way
To spend your whole career in public accounting, there has to be a time in your life when you are at least a pretty good accountant. To really thrive you need to then develop other skills. At the local and regional level you need to be able to generate and retain business.
I’m not sure about the national level. My brief exposure on the national scene made me think that I should have studied Machiavelli a little more closely. After my firm was acquired I lasted longer than most of the tax partners, but that is not saying much.
Regardless, there are some people who instead of honing selling and political skills become great accountants. Some of them are very compliance oriented. They get frustrated by things not being right, because things should be done right, because right is right even though the client doesn’t want to pay for it and the IRS will never figure it out.
That’s who the IRS should be hiring. In many areas of tax practice the best and the brightest work for the IRS for a few years, then go into public accounting or the law firms for much bigger money. The IRS should turn the tables and grab up the compliance oriented people who know where the bodies are likely buried. IRS could offer good benefits, a better work life balance and a great deal of perverse satisfaction.
Turn Yourself In Or Else
Rather than or in addition to ramping up regular enforcement dramatically increase IRS Criminal Investigation. That is the part of the IRS that really scares everybody. As the new batch of armed accountants is being trained, announce a major amnesty initiative. Let it be known that the initial focus of the new CI people is going to be officers of large corporations.
That should raise a good bit of money and it also might provide a road map into the latest schemes.
The Positive Approach
Once people have more wealth than they are ever going to need and realize that you can only eat so many steaks (or so much avocado toast) in a day, they sometimes do very positive things with their wealth. They might endow a university or a museum. There is an entire industry devoted to convincing people to do that sort of thing.
There was this joke that if they had wanted to find Osama Bin Laden more quickly, they should have had Yale grant him an honorary degree and then just tail the development officers that would hunt him down.
So in addition to the satisfaction of supporting education or art or whatever, there is a good bit of ego gratification involved. Why doesn’t the federal government direct that same sort of psychology to the people who pay the largest amount of tax? It could be the top hundred or the top thousand maybe with different levels like the colleges do.
After the numbers are in and the statute has expired on refunds the top taxpayers get a call from the IRS Commissioner and are asked whether they want some additional recognition either publicly or privately. There are obvious things like a visit to the Oval Office, but there are all sorts of other possibilities. Personally I have always wondered what it was like to drive a tank.
More ordinary taxpayers could be awarded with certificates when they passed various thresholds of lifetime tax payments. This sort of thing would not work on everybody, but it would work on some people. I got into this idea a little more quite a while ago in this piece which I have just republished.
Ramping up IRS enforcement is probably a good idea. At least restore it to the level it was at ten years ago, but we could really use some other ideas.