The IRS needs more carrots rather than sticks
| June 8, 2023 1:00 AM
National Taxpayer Advocate Erin Collins has “urged” Congress to reallocate some of the Internal Revenue Service’s (IRS) enforcement funding to better taxpayer services and modernize IRS systems because the slug of Inflation Reduction Act (IRA) funding “disproportionately” favored enforcement. Her argument is persuasive:
The most efficient way to improve compliance is by encouraging and helping taxpayers to do the right thing on the front end. That is much cheaper and more effective than trying to audit our way out of the tax gap one taxpayer at a time on the back end.
Yes — helping taxpayers on the front end is the best way to close the tax gap, as well as the most efficient. Emphasizing enforcement over customer service also rightly stokes fears about broad, negative outcomes, such as that the IRS will waste untold taxpayer dollars chasing speculative or marginal revenue recoveries, while hardworking Americans and small businesses end up in a dragnet. The IRS’s insufficient plan for how it plans to use these taxpayer dollars does nothing to assuage these concerns.
The IRS’s recent $80 billion funding plan earmarked $47.4 billion for enforcement while dedicating just $4.3 billion for taxpayer services. U.S. Secretary of the Treasury Janet Yellen promised a plan that would allow the public and Congress to hold the IRS accountable for the project. However, the IRS plan lacks significant details, including precisely how the IRS will uphold Secretary Yellen’s pledge that no supplemental funding will be used to target taxpayers earning less than $400,000 per year — or even what the IRS exactly means by “$400,000 a year.”
More enforcement means more audits, and Americans know that IRS enforcement actions, whether a formal audit or called something else, are scary things. Supporters claim the supersized IRS will close the tax gap but only target rich tax cheats. However, the Joint Committee on Taxation has told us the biggest part of the “tax gap” is comprised of taxpayers in the low-and middle-income brackets, and IRS and other data support this. Available IRS data for the most recent tax year show that more than 92 percent of tax deficiencies are asserted against those making less than $100,000. Small and cash-heavy businesses are easy targets for an emboldened IRS, and so-called “passthrough” businesses whose owners leave funds in the business are even more likely to be caught in the IRS’s crosshairs. As more than 99 percent of Idaho’s businesses are small businesses, I am deeply concerned about how Idahoans will be affected by an enforcement-focused IRS.
This reinforces the need for enactment of legislation I introduced to codify in law that the IRS cannot use the $80 billion to increase audits on small businesses and working families.
The IRS has many deeply concerning issues to fix: abysmal customer service; leaks of taxpayer data; allegations of unjust targeting and preferential treatment in high-profile cases; destruction of taxpayer-filed documents; and more. The IRS should be focused on fixing all of those problems to make the agency function better for taxpayers. This all begs the question:
What can be done to address a growing IRS?
Solution No. 1 — Congress can roll back the IRA funding for non-taxpayer services and focus on taxpayer service; and
Solution No. 2 — Congress can heed the National Taxpayer Advocate’s advice: focus on achieving higher tax rate compliance by helping people deal with an overly-complex tax code, rather than sending out an army of auditors.
Working with Idahoans and all American taxpayers to fix any perceived tax collection problems is far more effective and just. That starts with improving IRS services, not increased audits on Idaho’s small businesses and working families. As I advocate for these commonsense steps, I will continue to press the IRS to prioritize taxpayer services; guard against partisan targeting; protect taxpayer privacy; modernize technology; and provide needed transparency to allow for meaningful independent IRS oversight.
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Mike Crapo represents Idaho’s First Congressional District in the U.S. Senate. He can be reached at crapo.senate.gov.