The IRS and the Treasury Department will soon provide a spending plan for the resources provided by the Inflation Reduction Act. This plan will identify a phased-in approach of modernizing and critical staffing the IRS through 2031 to better serve the needs of our country, and especially to serve you.
Transparency will reassure every American that these resources are spent in a reasonable, meaningful manner. The spending will remain under considerable oversight by Congress, Treasury, the media, and the public. The IRS invites this oversight and the opportunity to demonstrate what it can accomplish in terms of modernizing systems to improve the quality of service and enforce the tax laws fairly and impartially.
Each year, the IRS processes about 95% of the country’s gross receipts. Bridges, highways, ships, and planes are contracted out and paid for with revenue that mostly flows through the IRS. Accordingly, the agency is crucial to providing meaningful services, infrastructure, and protections. Yet it has long struggled to receive sufficient resources to ensure tax laws are enforced fairly and that Americans receive the level and quality of service they deserve.
You deserve a fully functioning IRS that can answer the tens of millions of annual phone calls in a timely manner and offer accurate meaningful assistance to each caller; that can process the more than 100 million individual annual refunds and hundreds of millions of individual and business tax returns quickly and efficiently; that can offer in-person assistance in your communities and provide meaningful guidance through different media (in person, on the phone, and online) in the language most appropriate for you.
A functioning IRS depends on critical, multi-year funding allowing the agency to plan for staffing, allocate resources, and modernize operating systems. The agency will invest its new funding in employees and IT systems to better serve all taxpayers, including small businesses and middle-income taxpayers. Enhanced IT systems and taxpayer service also will mean that honest taxpayers will be able to comply more easily, resulting in a lower likelihood of being audited.
Compliance Is Important
The new federal funding will help the IRS respond appropriately in areas of challenge—large corporate and global high net worth taxpayers—as well as in new areas such as pass-through entities and multinational taxpayers with international tax issues that needs sophisticated, specialized IRS teams that can unpack complex structures and identify potential areas of noncompliance. It is unacceptable for the tax administrator of the United States to be resource challenged when examining some of the most sophisticated individual and corporate taxpayers on earth.
Technological advances have helped but haven’t kept pace with the IRS’ ever-increasing responsibilities and challenges. The integrity and fairness of our administrative tax system relies on the IRS maintaining a strong, visible, robust compliance presence directed to potentially noncompliant taxpayers.
Wage earners mostly pay their taxes through withholding on a W-2 form. High-wage earners, often described as “executives,” also pay through withholdings but often have indirect income sources of income on a Form 1099. When there’s withholding and substantial information reporting, there’s a 99% rate of taxpayer compliance. But when there’s substantial information reporting and no withholding, the compliance rate dips to 97%.
Higher income taxpayers, often described as “entrepreneurs,” generally receive their income from a variety of sources, including layers of pass-thru, domestic, and foreign based entities. These sources of income sometimes aren’t otherwise reported, and determining the accuracy of the underlying individual tax returns can be difficult. Without substantial information reporting and no withholding, the rate of compliance dips to 45%.
About 8% of the highest-earning individuals are currently subjected to an IRS field examination within the normal three-year period of limitations. A decade or so ago, about 20% of these taxpayers were audited, and their structures were significantly less complex. None of the sophisticated tax structures for wealthy taxpayers are designed to help overpay the underlying tax liability. When audited, high-end corporate and individual taxpayers are represented by teams of experienced tax professionals.
Taxpayers in these examinations are less burdened when IRS representatives have the training and resources to examine, understand, and resolve disputed issues. An experienced examiner knows when to pursue a more detailed examination but also knows when to resolve or terminate one.
Who Benefits Most From an Underfunded IRS?
Certainly not wage earners having their taxes withheld. Underfunding affects every facet of IRS operations. It effectively exempts many without visible, difficult-to-identify income streams from an examination and, for some, from satisfying their legal tax obligations. Recovering taxes from those who are noncompliant is fairer than raising taxes on compliant taxpayers to fund the important operations of our country.
No one would seek an examination of their tax return. However, there are a million Americans—including higher-income individuals—who simply ignore their obligation to file a tax return. Millions of others underreport their income or underpay their taxes directly or through sophisticated arrangements designed to avoid or evade paying the correct amount.
Any reasonable estimate for the underpayment, underreporting, and non-payment of individual taxes exceeds hundreds of billions of dollars each year. For decades, resource challenges have limited the ability of the IRS to appropriately engage with these individuals and businesses.
Meaningful but fair examinations focused on perceived significant noncompliance support the integrity of our administrative tax system. Taxpayers are selected for an examination based on certain impartial criteria and algorithms. No IRS employee has the ability to select any taxpayer for examination; they perform their duties based on the matters assigned to them.
Like you, more than 83% of Americans voluntarily comply with their filing and payment responsibilities. The IRS administers the tax law as written by Congress and interpreted by the federal courts. However, tax law is complex and filled with entitlements for deductions, exemptions, and exclusions. The IRS financially supports various volunteer organizations and clinics that provide high quality, exceptional pro bono (i.e., free) representation and assistance to lower-income taxpayers.
The IRS must serve taxpayers in a manner that facilitates voluntary compliance. Taxpayers who are willing to comply must receive appropriate levels of support and timely guidance while respecting their rights and forever safeguarding their information. Providing high-quality, personalized service is a critical component in helping taxpayers understand and comply with their filing and reporting obligations. The IRS also must continue to deter those who might be inclined to evade their legal tax obligations and appropriately pursue those who do so.
I’d like to note guidance issued almost 70 years ago by former IRS Commissioner Mortimer Caplin, a legend in the tax community. In part, Rev. Proc. 1964-22 notes that it’s the IRS’ duty to “correctly [apply] the laws enacted by Congress” and “to perform this work in a fair and impartial manner, with neither a government nor a taxpayer point of view.”
The multi-year funding from Congress will allow the IRS to significantly enhance taxpayer services and compliance activities in support of law-abiding taxpayers—you want this, and so does the IRS.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Charles Rettig served as IRS commissioner from 2018 to 2022. He previously was a tax lawyer based in Los Angeles.
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