IRS commissioner: 'We do get outgunned' when trying to enforce taxes on wealthy
The Internal Revenue Service (IRS) has been struggling to administer and collect taxes from corporations and the wealthiest Americans due to insufficient resources, according to IRS Commissioner Charles Rettig.
"We do get outgunned, I mean there's no other way to say it," Rettig told the Senate Finance Committee on Tuesday when asked whether the agency would better pursue corporations and high-income earners if the budget was increased. "I can assure you we're using our resources to the absolute best of our ability, and it's not a dedication or a people issue — it's a numbers issue."
The tax gap between what corporations and the wealthy should be paying in taxes versus what the IRS is collecting "could approach and possibly exceed $1 trillion per year," Rettig added.
Since 2010, the IRS has lost 21,000 employees and its budget has declined around 20% when taking inflation into account. The audit staff has declined by a third for that same period leading to the 2019 audit rate for individuals being the lowest in over 20 years.
"The revenue side has been significantly affected by budget cuts," Samantha Jacoby, senior tax legal analyst at the Center on Budget and Policy Priorities told Yahoo Money. "There's just a huge amount of tax that's getting uncollected every year because people aren't voluntarily complying with the tax laws and the IRS isn't able to police that."
The IRS failed to collect over $38.5 billion from individuals making $200,000 or more as of May 2019, the Treasury Inspector General for Tax Administration recently said in a report. Taxpayers who make above $1.5 million paid only 39% on average of what they owe to the IRS, the report found.
Read more: 7 things that are surprisingly taxable
"We have about 6,500 front-line revenue agents who handle the most complex, sophisticated, individual and corporate matters, substantially," Rettig said. "Every one of them [is] dedicated to either high-income individuals, the most egregious cases, or the largest corporations."
'The tax gap is substantially larger than the IRS estimate'
Despite the best efforts of the IRS, some of the wealthiest Americans are failing to report more than a fifth of their taxable income by using sophisticated forms of tax evasion to avoid paying Uncle Sam, a recent study by the National Bureau of Economic Research (NBER) found.
"The tax gap is substantially larger than the IRS estimate," Daniel Reck, a professor at the London School of Economics and one of the authors of the report, told Yahoo Money in March. "For the top 0.1% of the distribution, our estimates suggest that it's almost doubling the tax gap."
Unreported income for the top 0.1% is 1.8 times higher than previously estimated, the paper found, while it is 1.3 times higher than originally calculated for the top 1%.
These Americans employ two types of advanced tax evasion strategies — concealed offshore wealth and pass-through businesses — that generate these big tax gaps among the wealthiest. To close the tax gap, the IRS needs to invest in more sophisticated examination techniques and hire more experienced examiners, according to Reck.
Read more: Here's how you should use your tax refund in 2021
In his recent $1.52 trillion budget request for 2022, President Joe Biden is calling for $1.2 billion in additional funding for the IRS, largely so the agency can funnel more resources in order to audit wealthy taxpayers and corporations.
The additional funding would increase the agency’s 2022 fiscal year budget by 10% over the $12 billion baseline budget for the 2021 fiscal year. The majority of the funding — around $900 million — would go to increasing resources for oversight of corporate and wealthy Americans' tax returns and ensure compliance.
The increased funding for audits comes as the Biden administration and Democratic lawmakers are floating several different tax measures related to higher taxes on wealthy Americans and corporations.
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova
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