[Senate Hearing 118-602]
[From the U.S. Government Publishing Office]
S. Hrg. 118-602
HOUSE REPUBLICAN SUPPLEMENTAL IRS FUNDING
CUTS: ANALYZING THE IMPACT ON FEDERAL
LAW ENFORCEMENT AND THE FEDERAL DEFICIT
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
MAY 16, 2023
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
______
U.S. GOVERNMENT PUBLISHING OFFICE
59-784--PDF WASHINGTON : 2025
COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland TIM SCOTT, South Carolina
SHERROD BROWN, Ohio BILL CASSIDY, Louisiana
MICHAEL F. BENNET, Colorado JAMES LANKFORD, Oklahoma
ROBERT P. CASEY, Jr., Pennsylvania STEVE DAINES, Montana
MARK R. WARNER, Virginia TODD YOUNG, Indiana
SHELDON WHITEHOUSE, Rhode Island JOHN BARRASSO, Wyoming
MAGGIE HASSAN, New Hampshire RON JOHNSON, Wisconsin
CATHERINE CORTEZ MASTO, Nevada THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts MARSHA BLACKBURN, Tennessee
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
(II)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Thune, Hon. John, a U.S. Senator from South Dakota............... 3
WITNESSES
Sarin, Natasha, Ph.D., associate professor, Yale Law School, Yale
School of Management; and former Treasury Counselor for Tax
Policy and Implementation, New Haven, CT....................... 5
Fort, John D., director of investigations, Kostelanetz, LLP; and
former Chief, Criminal Investigation, Internal Revenue Service,
Washington, DC................................................. 7
Sepp, Pete, president, National Taxpayers Union, Washington, DC.. 9
Edwards, Chris, Kilts Family Chair in Fiscal Studies, Cato
Institute, Washington, DC...................................... 10
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Edwards, Chris:
Testimony.................................................... 10
Prepared statement........................................... 43
Fort, John D.:
Testimony.................................................... 7
Prepared statement........................................... 48
Responses to questions from committee members................ 56
Johnson, Hon. Ron:
Letter to Chairman Wyden et al. from Empower Oversight and
Nixon Peabody LLP, May 15, 2023............................ 57
Sarin, Natasha, Ph.D.:
Testimony.................................................... 5
Prepared statement........................................... 58
Sepp, Pete:
Testimony.................................................... 9
Prepared statement........................................... 66
Responses to questions from committee members................ 90
Thune, Hon. John:
Opening statement............................................ 3
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 93
Letter to Senators Wyden and Crapo from the Federal Law
Enforcement Officers Association, May 15, 2023............. 94
Communication
Center for Fiscal Equity......................................... 97
(III)
HOUSE REPUBLICAN SUPPLEMENTAL IRS
FUNDING CUTS: ANALYZING THE IMPACT ON
FEDERAL LAW ENFORCEMENT
AND THE FEDERAL DEFICIT
----------
TUESDAY, MAY 16, 2023
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:06
a.m., in Room SD-215, Dirksen Senate Office Building, Hon. Ron
Wyden (chairman of the committee) presiding.
Present: Senators Cantwell, Menendez, Carper, Brown,
Bennet, Casey, Warner, Whitehouse, Cortez Masto, Grassley,
Thune, Daines, Johnson, Tillis, and Blackburn.
Also present: Democratic staff: Patricio Gonzalez, Senior
Investigator; Eric LoPresti, Detailee; Sarah Schaefer, Chief
Tax Advisor; Joshua Sheinkman, Staff Director; and Tiffany
Smith, Deputy Staff Director and Chief Counsel. Republican
staff: Michael Gould, Detailee; and Don Snyder, Senior Tax
Counsel.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR
FROM OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The Finance Committee will come to order.
In recent months, the committee has held three hearings,
two with Commissioner Werfel and one with Secretary Yellen, in
which Republicans have attacked the Inflation Reduction Act
funding for the IRS. The first bill that the House Republicans
passed in 2023 repealed the bulk of the funding.
Repeal is the centerpiece of Speaker McCarthy's default
plan, which would also destroy 780,000 jobs and increase the
odds of a recession. By all outward appearances, repealing this
funding is the Republicans' top economic priority. That is why
the Finance Committee meets this morning to break down, point
by point, all the harm repealing would do, especially as part
of the overall McCarthy plan.
First, I would like to focus on the major setback for
criminal law enforcement. As a way to frighten typical
taxpayers, Republicans have fabricated a whole score of stories
about 87,000 armed agents busting down the doors at local
businesses and people's homes. This is nonsense.
The truth is, the IRS has a modest but critically important
team of law enforcement personnel. They work on busting human
trafficking rings, drug cartels, and enablers of child
exploitation. They root out individuals and groups who finance
the terrorists. They help crack down on criminal tax fraud and
evasion, including the kind of evasion the Finance Committee
identified with our 2-year investigation of how Swiss bank
Credit Suisse enabled a group of dual U.S. and foreign citizens
to cheat on paying U.S. taxes.
At the moment, the IRS Criminal Investigation division is
working with partners in Ukraine to hunt down crooks who are
evading sanctions on Russia. Recently, Criminal Investigation
collaborated with the FBI, the Department of Justice, and law
enforcement partners around the world on the largest fentanyl
distribution takedown in history. It resulted in hundreds of
arrests and the seizure of $54 million and 850 kilograms of
drugs, including the equivalent of millions of lethal doses of
fentanyl.
Republican cuts reduced the workforce of Criminal
Investigation special agents by 26 percent. Democrats passed
IRA funding to help rebuild it, but Republicans now wish to
repeal those funds. Others say that the funding ought to be
targeted elsewhere. So to me, the question is, colleagues, if
you want to cut this enforcement spending, which criminal
activity do you propose letting slide: drug rings, money
laundering, sex trafficking, child abuse?
Yesterday, addressing this issue, the committee received a
letter from the Federal Law Enforcement Officers Association
opposing the Republican plan. This is a group representing tens
of thousands of Federal law enforcement officers from across
dozens of agencies. Without objection, I will put that into the
hearing record.
[The letter appears in the appendix beginning on p. 94.]
The Chairman. The second issue: coming off the smoothest
tax filing season in many years, the McCarthy repeal plan would
once again clobber taxpayer service and force Americans to
spend hours waiting on hold, with all that music, for the IRS.
House Republicans are hiding the ball on this issue. The
McCarthy plan would leave the temporary IRA funding for
taxpayer service in place, and Republicans will insist that is
proof that they are interested in maintaining better service.
Here is what the Republicans aren't telling the American
people. The McCarthy plan would also hit the IRS with across-
the-board budget cuts just like the ones that steadily wrecked
taxpayer services before the Democrats were able to start
fixing things last year. Nobody is asking for a return to 10-
or 15-percent call response rates at the IRS.
Third, the McCarthy plan to repeal the IRS funding would
lead to a $120-billion increase in the deficit. How would this
plan offset the deficit increase? By kicking people off their
health insurance, increasing child hunger, worsening education,
weakening border security--and those are just a few of the
examples.
With that said, if you want to see who are the big winners
of the McCarthy IRS defunding plan, it is billionaires and
corporations who cheat on their taxes. The Inflation Reduction
Act funding for the IRS was designed to make sure everybody
paid what they owe. Repealing that funding is a $191-billion
giveaway to wealthy tax cheats.
The effect of Republican IRS cuts has been clear. From 2010
to 2017 when the Republicans cut most aggressively, in terms of
the IRS, audit rates for millionaires went down 77 percent; for
large corporations, 44 percent; complex partnerships, down 80
percent.
Performing those audits takes a lot of hard work by skilled
staff, and the IRS has lost 40 percent of those agents.
Republican cuts shifted the burden of tax enforcement onto
working people. That is because auditing them is easy. An audit
of a simple individual's taxpayer return takes 5 hours on
average. Auditing a higher-
income tax cheat takes an average of 250 hours. Corporate
audits and audits of large, complex partnerships can take even
longer, sometimes several years. They require big teams with
lots of expertise.
Republican budget cuts systematically dismantled much of
that expertise in the previous decade, and the McCarthy plan
would decimate it in the years ahead. I will close by saying
the McCarthy plan, in my view, will lead to more tax evasion by
the very, very wealthy; worse taxpayer service for law-biding
Americans; and especially, colleagues--this is why I documented
example after example--fewer prosecutions of drug cartel
members, sex criminals, sanctions evaders, and money
launderers. There is not a member I know of who supports those
objectives, but that is what is really involved here.
Lots to discuss. I look forward to hearing from our
witnesses. Senator Thune is our ranking member today. We always
like working with him.
Senator Thune?
[The prepared statement of Chairman Wyden appears in the
appendix.]
OPENING STATEMENT OF HON. JOHN THUNE,
A U.S. SENATOR FROM SOUTH DAKOTA
Senator Thune. Thank you, Chairman Wyden, and while Ranking
Member Crapo is unable to attend due to a prior commitment, it
is a pleasure to briefly fill in on his behalf, and I look
forward to continue working with all of my colleagues on this
committee, especially in regard to responsible stewardship of
taxpayer dollars.
Today, we are going to discuss the IRS's supplemental
funding provided in the so-called Inflation Reduction Act. The
chairman has particular interest in the House-passed Limit,
Save, and Grow Act, and how it could impact IRS enforcement
activities.
Since the Finance Committee has yet to hold a hearing
dedicated specifically to the $80-billion allocation, I find it
curious that some prefer to focus on a House bill related to
this funding, rather than the effectiveness or oversight of the
funding itself. Nevertheless, here we are.
Last August, with the narrowest of majorities, Democrats
gave the IRS approximately $80 billion, a sum equal to six
times the agency's 2022 budget. Of the $80 billion provided the
IRS, more than half, about $46 billion, is directed toward
enforcement activities, which includes increasing audits and
hiring more enforcement agents.
But only 4 percent of the $80 billion--4 percent--was
earmarked for improving taxpayer services. That it is an
overwhelmingly disproportionate amount directed to increased
enforcement compared to the taxpayer services. The National
Taxpayer Advocate herself criticized the lopsided funding for
enforcement.
Since the IRA's enactment, Democrats have doubled down and
made calls to further super-size the IRS's enforcement arm. The
President's budget seeks an additional $29 billion, on top of
the $80 billion in supplemental funding to the IRS, for
enforcement--again, in addition to the $46 billion for
enforcement the IRS received only months ago.
For context, the IRS's supplemental enforcement funding
amount alone eclipses appropriations for Customs and Border
Protection, which received approximately $18 billion in total
this year. Based on funding priorities, it seems the Democrats'
intent is to create a bigger, more intrusive enforcement-
focused agency without annual accountability to taxpayers and
Congress.
While Republicans are open to discussions about IRS
resources, efficiency, accountability, and improvements to
taxpayer services should be prioritized, all of which are
lacking in the Inflation Reduction Act. Some on the other side
of the aisle will say that the IRS needed $80 billion to
address the tax gap, refill the agency's coffers, and tune up
the agency's customer service. But that is hardly the case.
First, the tax gap. The difference between taxes owed and
paid has been steady for decades, and this committee should
pursue bipartisan measures to narrow it. But any such effort
must strike the appropriate balance between taxpayer
responsibilities and taxpayer rights. Simply flooding the IRS
with $80 billion in unchecked resources will not magically
yield $700 billion in additional tax revenue, a fanciful
estimate that President Biden made 2 years ago.
Policymakers need to be honest about what is doable with
respect to the tax gap, and instead focus on encouraging
voluntary compliance, as the current and former National
Taxpayer Advocates argue. It should also be noted that tax
compliance levels in the U.S. remain substantially unchanged
since at least the 1980s.
According to recent IRS data, about 84 percent of taxes
were paid voluntarily and on time. After enforcement efforts
and late payments were taken into account, about 86 percent of
taxes were paid. As the former Taxpayer Advocate Nina Olson has
said, most Americans pay their taxes voluntarily, and data show
that increased enforcement adds a small fraction to what the
government collects.
Second, IRS budgets have been generally stable for at least
the past 2 decades. Aside from the agency's all-time high
budget of 2010, which spiked under all-Democrat rule, the IRS's
funding has remained broadly in line with historic norms.
The argument the Republicans have somehow starved the
agency simply does not hold, and to the extent that IRS budgets
have been out of the norm, there is a lot of direct correlation
with the decline in employee head count that some of my
Democrat colleagues claim. The IRS's employee head count has
been declining for several decades, regardless of the growth or
contraction of the IRS's budget across dozens of Congresses and
multiple presidential administrations.
Third, the IRS's recent funding windfall lacks any binding
reports or oversight measures. As Ranking Member Crapo recently
put it, and I quote, ``The IRS has embarked on a spend first,
plan later approach that is not transparent or responsible, and
is a sure-fire recipe for error, waste, and mismanagement.'' I
have to say, I could not agree more.
The IRS's Inflation Reduction Act strategic operating plan,
which was recently released more than 45 days late, was big on
platitudes but short on details. But I was interested and
disturbed to learn from the plan that the IRS intends to spend
$3.8 billion of the allocated $80 billion on ``energy
security.'' Energy security, by the way, in this context, means
implementing the IRA's climate tax agenda. By almost any
reasonable measure, the nonbinding plan is instructive in how
ineffectual a plan is without timely updates, clear data on
costs, and meaningful oversight from Congress. To address this
gap and to better track taxpayer services, I introduced the IRS
Funding Accountability Act with Senator Grassley, and the
Increase Reliable Service Now Act with Senator Collins.
Pumping the brakes on new enforcement activities from the
$80-billion funding allocation until basic accountability
measures are met does not amount to protecting wealthy tax
cheats, as some have suggested. It is about the responsible
stewardship of taxpayer dollars.
We have an excellent panel before us today. Thank you all
for being here, and I look forward to hearing your testimony.
The Chairman. Thank you, Senator Thune, and we are going to
have a spirited discussion. Let me introduce our guests.
Professor Sarin is an associate professor of law at Yale
Law School, and she has talked with us often over the years on
tax issues, and we appreciate her good work.
Mr. Fort is the director of investigations at Kostelanetz,
LLP. He served as Chief of Criminal Investigation at the IRS,
and I think his testimony today and his availability for
questions will be very helpful.
Our next witness is Mr. Sepp, president of the National
Taxpayers Union. He leads NTU's government affairs effort.
Before coming to NTU, he served with the St. Louis County Board
of Elections and with the U.S. Senate campaign. I have talked
to Mr. Sepp often over the years.
And then we have Mr. Chris Edwards, the Kilts Family Chair
in Fiscal Studies at the Cato Institute.
All of these individuals are experienced. We are going to
have a good debate. Let us start with you, Dr. Sarin. We are
going to make your prepared remarks a part of the record in
their entirety. If you could summarize your views, that would
be very helpful.
Dr. Sarin?
STATEMENT OF NATASHA SARIN, Ph.D., ASSOCIATE PRO-
FESSOR, YALE LAW SCHOOL, YALE SCHOOL OF MANAGE-
MENT; AND FORMER TREASURY COUNSELOR FOR TAX POL-
ICY AND IMPLEMENTATION, NEW HAVEN, CT
Dr. Sarin. Chairman Wyden, Ranking Member Thune, and
members of the committee, thank you for inviting me to share my
views on the generational opportunity to improve our tax system
presented by the Inflation Reduction Act's $80-billion
investment in the IRS.
One of the privileges of my time at the Treasury Department
was having a chance to travel and visit IRS campuses across the
country. I traveled to Kansas City to meet employees who gifted
each other the red pens they needed to circle line items on
returns that they would transcribe by hand, because the IRS
could not afford to buy them. I traveled to Austin, where
unprocessed returns dating back to the pandemic were stacked in
the cafeteria, because there was nowhere to store them. I
traveled to Ogden, UT to an IRS job fair, where front-line
employees were pridefully recruiting future civil servants,
describing the months they had spent in person at the outset of
the pandemic ensuring that the tax system would continue to
run.
The case for the Inflation Reduction Act's much-needed
investment in this beleaguered agency is clear. That said, it
is unlikely that the IRS is going to win a popularity contest
any time soon. One IRS colleague explained the reality to me as
such: no one likes the IRS, and that is okay. We are the tax
collector. Who is going to like the tax guys?
Even though the IRS might not be the most popular part of
the U.S. Government, it is among the most important. The agency
collects 96 percent of the revenue that funds the government.
It touches just about every American household and business
each year.
Over the last several years, it was responsible for
disbursing critical support to millions of families. It has
done all this for far too long without the resources in place
to serve American taxpayers, or administer the tax laws the way
the American people deserve.
Now, thanks to the IRA, all that has changed. Already this
filing season, the IRS achieved an 87-percent level of service,
and those backlogs are gone, and IRS employees have their
cafeteria back.
The IRS has also begun to overhaul its tax compliance
efforts. This is an area where the agency's work has been
subject to substantial confusion and misinterpretation. So I
would like to make four points about noncompliance in our tax
system, and the importance of the IRA's investment.
First, the tax gap--the difference between owed and
collected taxes--is large, more than 2 percent of GDP on an
annualized basis, or about $600 billion a year. To get a sense
of that magnitude, consider this. If the United States was able
to collect the taxes that are already on the books absent any
other changes, the deficit would shrink by nearly half.
Second, the tax gap is concentrated. The top 1 percent is
responsible for nearly 30 percent of the measured tax gap, and
that number is likely an understatement, because the IRS has
struggled to estimate the noncompliance of high-income
individuals and the corporations and pass-through entities that
they own.
It is exactly here that an underresourced IRS has lost the
most capacity. In the last decade, multimillionaire audits
declined by more than 80 percent, and audit rates have been
approximately zero for complex tax structures like
partnerships, which represent more than 35 percent of business
income today. So this is where new enforcement resources
appropriately will be focused.
Third, there is a lot of revenue at stake. In my new paper
with former Assistant Secretary for Tax Policy Mark Mazur, we
estimate that the IRA's investment in the IRS could raise
around $560 billion in new tax collection in this decade, and
more than $1.5 trillion over the course of the next 2 decades.
But fourth, this is about more than just revenue. It is
about fairness. We have underinvested in the IRS for years.
That has created an inequitable tax system where the vast
majority of your constituents pay all that they owe, but some
who earn income in opaque ways--disproportionately the
wealthiest--do not.
That is why the IRA is so critical. To be sure, there is an
implementation challenge ahead, but with multiyear funds and a
Commissioner at the helm with both public- and private-sector
management experience, the IRS is finally set up to succeed.
Yet it will need help. In the years ahead, it will be
critical for Congress, in its oversight capacity, to continue
to monitor the progress of the IRS. I am keen to talk with you
about how to ensure this funding is spent in a diligent and
careful way.
It will also be paramount to preserve and supplement, in
the discretionary appropriations process, the historic
investment the IRA made in our tax system and in our Nation's
fiscal health.
Thank you. I look forward to your questions.
The Chairman. Thank you very much, Dr. Sarin. We will have
questions, for sure.
[The prepared statement of Dr. Sarin appears in the
appendix.]
The Chairman. Mr. Fort?
STATEMENT OF JOHN D. FORT, DIRECTOR OF INVESTIGA-
TIONS, KOSTELANETZ, LLP; AND FORMER CHIEF, CRIMINAL
INVESTIGATION, INTERNAL REVENUE SERVICE, WASHING-
TON, DC
Mr. Fort. Thank you. Chairman Wyden, Ranking Member Thune,
and members of the committee, thank you for the opportunity to
discuss the need for consistent funding for the Internal
Revenue Service to address both critical service updates for
the taxpayer experience, and sufficient support for enforcement
activities.
As the former Chief of the Criminal Division of the IRS or
IRS CI, I have witnessed firsthand the important role that
enforcement plays in promoting voluntary compliance with the
Nation's tax laws. I understand that my role at this hearing
today is to talk about the real-life impact of funding cuts on
Federal law enforcement.
So let us start there, with law enforcement. The Criminal
Investigation division is the sixth largest Federal law
enforcement agency in the United States. There are currently
about 2,100 special agents in IRS CI. The high-water mark for
CI special agents was in the late 1990s, when IRS CI had
approximately 3,600 special agents.
Even after the planned IRA-funded hiring, CI will not
surpass that number. I think it is also important that we call
these law enforcement personnel special agents and not just
agents, to avoid any confusion with revenue agents who do
enforcement on the civil side of the IRS.
This confusion in language and misrepresentation of facts
over the last 6 to 9 months is careless and dangerous, and has
been the cause of threats to men and women who serve this
country by investigating some of the most dangerous crimes in
our Nation.
IRS CI is the only agency with the authority to investigate
and recommend prosecution for violations of the Federal tax
code. IRS CI forms the backbone of the voluntary compliance
regime that our tax system depends upon. The fact that you can
be incarcerated for committing felony tax crimes in the United
States provides a strong deterrent to those looking to take
unfair advantage over their neighbors and business competitors.
Because of this, you can literally draw a straight line on
a graph that shows the decrease in compliance as staffing for
CI goes down. Without sustained funding for rigorous
enforcement, the system of voluntary compliance will continue
to erode.
IRS CI services are in high demand by both the Department
of Justice and by the U.S. Attorneys Offices around the
country. There are simply not enough resources to sufficiently
work all the priorities of the IRS and the DOJ. Unlike the
civil side of the IRS, IRS CI does not have full control over
the cases they work.
Every case worked by IRS CI, whether it is a tax case or
another Federal criminal violation, is worked in partnership
with the Department of Justice and the U.S. attorneys who
prosecute the cases.
I witnessed firsthand the impact that IRS funding cuts have
on enforcement. Difficult choices must be made, involving
investigative priorities, and investigators had to walk away
from many strong cases because there simply were not enough
special agents to handle the demand for their expertise.
In addition to being the only Federal law enforcement
agency authorized to investigate Federal criminal tax
violations, CI also works a variety of high-profile, high-
impact cases at the request of the Department of Justice, due
to their financial investigative expertise that is unmatched.
CI participates in sanctions investigations involving
Russian oligarchs, corrupt politicians, and those that
facilitate the illicit movement of money on behalf of
sanctioned individuals or organizations. Just last week, IRS CI
made news by training three Ukrainian law enforcement agencies
with the help of private-sector partners in cryptocurrency and
cyber tools.
You may recall the high-profile case in 2019 called
``Welcome to Video,'' a case initiated and held by IRS CI. This
case led to the seizure of the largest darknet marketplace for
child exploitation, resulting in over 330 arrests around the
world and 23 kids saved who were being actively abused.
In 2020, CI led an investigation revolving around
cryptocurrency fundraising for several terrorist organizations
including Hamas, Al-Qaeda, and ISIS. This concluded in the
largest crypto seizure tied to terrorists to date.
Earlier this month, the Attorney General announced results
from Operation SpecTor, which was a coordinated international
effort that spanned three continents to disrupt dark web
fentanyl and opioid trafficking. CI led multiple cases under
this umbrella operation.
These cases are not what you think of when you think of IRS
Criminal Investigation. But the expertise and reputation the
agency has developed in more than 100 years is exactly the
reason that CI is needed on these cases. The men and women of
IRS CI are often behind the scenes and do not seek the
spotlight, but their extraordinary work is critical to the
success of U.S. law enforcement efforts.
Chairman Wyden, Ranking Member Thune, and members of the
committee, thank you again for the opportunity. I believe the
additional funding provided for the IRS in the IRA is a long-
overdue game-changer for the agency.
Thank you, and I welcome your questions.
[The prepared statement of Mr. Fort appears in the
appendix.]
The Chairman. Thank you very much, Mr. Fort.
Mr. Sepp, welcome.
STATEMENT OF PETE SEPP, PRESIDENT,
NATIONAL TAXPAYERS UNION, WASHINGTON, DC
Mr. Sepp. It is an honor to be here, Chairman Wyden,
Senator Thune. I promise I will not present on all of these
materials at once, but I do hope we will actually get to these
materials. It is very important for all of us to recognize a
few realities here today.
First of all, this amount of funding for the Internal
Revenue Service has never been accompanied by so little detail.
Case in point: the 1998 IRS Restructuring and Reform Act was
preceded by a 200-page report, a 184-page long bill. The
Taxpayer First Act of 2019 was preceded by upwards of 4 years'
worth of hearings, stakeholder engagement, and a 250-page
implementation report. We got nine paragraphs in the Inflation
Reduction Act to describe an agency transformation.
We also need to recognize though, on the Republican side of
the aisle, that the House bill clawing back the funding will
never get past this committee, much less to the President's
desk. We need to accept that reality. And the Democratic side,
of course, I would hope, would accept the reality that Federal
law enforcement agencies have always been built with guard
rails, and Democrats have been at the forefront of doing that.
Maybe we can come together with those realizations and figure
out how to move forward.
Let us also realize that while we argue about how much
money can be raised here, like revenue angels dancing on the
head of the pin, there is the point to the pin, the sharp end,
and that sharp end is going to affect everyone in America. We
debate over a $400,000 audit threshold. We are getting some
clarity about that.
But the point is, in the strategic operating plan, the IRS
is admitting that there will be other enforcement activities
funded by the new money that will touch all taxpayers. Audits
are just one tool in the compliance toolkit.
So it is with the revenue estimates. CBO has gone back and
forth on how much money this IRA enforcement funding will
raise. They say a net of $100.4 billion. Is it 50.2? It is
150.6? That again misses the purpose. Unless we get the agency
transformation right, those revenues are not going to
materialize anyway. That is why we need to get to work on a
number of important items to make sure this agency
transformation is a success, not only for the agency, not only
for raising revenues, but for taxpayers themselves.
How do you do it? There is a turnkey operation, the IRS
Oversight Board, that has remained dormant since 2015. It still
gets funded. Let us get nominees before this board. Let us
create a safe space for the White House to do that. Get that
board up and running.
Let us make sure we have off ramps for these new
enforcement efforts. We need a working appeals process.
Congress has spoken on this for the better part of 100 years.
The IRS pushes back with rulemakings that limit the right to
appeal.
We need global settlements that will allow the IRS to sweep
aside issues in courts that are relatively noncontroversial,
but are taking up a lot of resources. Settle those and move
forward so you can focus your legal resources. Look at
alternative dispute resolution. That is something that Senator
Cornyn has introduced in legislation this year: the Small
Business Taxpayer Bill of Rights.
We need to examine and evaluate in detail this funding
cliff for taxpayer services and business modernization. That is
coming up very quickly. Appropriations may not be this
committee's purview, but you can certainly make recommendations
in that regard.
We need to look at alternative compliance strategies.
Compliance is the end, not enforcement, and there are many ways
to get there. I will put in a word for tax simplification. Of
course, that aids compliance. That is a whole other hearing
topic in and of itself.
But let me say that there is plenty of bipartisan
legislation--from Senator Grassley, from Senator Wyden, from
Senator Cardin, former Senator Portman--lots that we can build
on. And we are here to help with that, with the Taxpayers First
Project, an assembly of Democrats, Republicans, former IRS
officials, current experts in academia--all of them ready to
help on this important project.
It is said you can walk and chew gum at the same time, that
the IRS can do this. Well, they not only have to do that, they
have to read a book, drive a car; they have to play a ping-pong
game, and they have to be a lifeguard at a swimming pool all at
once. That task is going to take a lot of building. Let us get
to work now.
Thank you so much.
[The prepared statement of Mr. Sepp appears in the
appendix.]
The Chairman. Okay. Thank you, Mr. Sepp.
Mr. Edwards?
STATEMENT OF CHRIS EDWARDS, KILTS FAMILY CHAIR IN
FISCAL STUDIES, CATO INSTITUTE, WASHINGTON, DC
Mr. Edwards. Thank you very much, Chairman Wyden.
While the IRA, as we have heard, includes $79 billion of
new mandatory funding for the IRS, 57 percent is going toward
enforcement, but just 10 percent for taxpayer services and
technology upgrades. In the President's budget, which includes
this additional funding, enforcement spending will more than
triple over the next decade. Enforcement outlays will grow from
38 percent of the IRS budget today to 61 percent a decade from
now.
That funding is off-kilter. As Senator Thune mentioned, the
National Taxpayer Advocate said, quote, ``Funding in the IRA is
disproportionately allocated for enforcement activities.
Congress should reallocate IRS funding to achieve a better
balance of taxpayer services needs and IT modernization.''
I think that is correct. The CBO says that the $79 billion
of new funding will raise $180 billion over 10 years. But that
does not mean that the new enforcement spending is good for the
economy. More aggressive enforcement would mean higher costs on
taxpayers. Higher enforcement would mean collateral damage on
law-abiding taxpayers, because the IRS makes many mistakes.
Consider disputes that end up in Tax Court. For cases
closed in the last 5 years, the IRS only got 48 percent of the
dollars it demanded via these. So the IRS made a mistake in
half of those cases. Similarly, IRS auditing imposes collateral
damage, because many audited taxpayers have already paid the
correct amount. More than 40 percent of partnership audits
result in no recommended changes.
For individuals earning more than $5 million, almost 40
percent of audits result in no change. Given that those audits
are driven by IRS algorithms, those are high shares of targeted
taxpayers who did nothing wrong. Of course, the IRS needs to
enforce. My point is that there are downsides, including higher
costs for families and businesses who have already paid the
correct amount.
Also, if you look at data from the GAO and elsewhere, the
marginal benefits of audits decline as auditing increases. The
latest Federal IRS estimate of the gross tax gap is $540
billion, which is 2.6 percent of U.S. GDP. The IRS tax gap as a
share of GDP has actually fallen a bit over the last 2 decades,
from 3.3 percent back in 2001.
Over recent years, despite the decline in audit rates, the
tax gap was 2.7 percent of GDP a decade ago; it is only 2.6
percent today. So, the extent of taxpayer errors and cheating
has not increased. It has really not changed much at all. There
are a number of studies that have compared tax gaps across
countries. The studies, I think, are rough estimates, but they
generally show that the U.S. tax gap is about the same or
smaller than typical tax gaps in Europe.
There are three better ways to boost tax compliance than
jacking up enforcement. First, keep tax rates low to reduce
incentives for cheating. The average corporate tax rate across
the OECD countries has plunged from 48 percent in the early
1980s to just 24 percent today. But corporate tax revenues as a
share of GDP are actually higher now than they used to be. With
lower rates, there is less incentive for avoidance and evasion.
Second, taxpayer compliance would rise if we improved IRS
services and technologies. The new strategic operating plan
from the IRS has tons of good ideas to make these improvements.
And third, Congress should simplify the tax code. Rising
complexity invites abuse. The past Taxpayer Advocate said
complexity, quote, ``facilitates tax avoidance by providing
criminals with opportunities to commit tax fraud.'' I think
that is exactly right. Unfortunately, rising tax complexity is
making the IRS's job much more difficult.
In a really interesting report last year, the GAO found
that for high earners, the average audit hours per return has
more than doubled since 2010. I think that reflects the rising
complexity in the tax code.
Recently, all the expanded energy breaks in the tax code
would cost billions of dollars for the IRS to administer, and
they will generate higher compliance costs, more abuse, and
more lobbying frankly, which is all pretty unproductive for the
overall economy.
So in sum, the official IRS data show that the tax gap is
not rising compared to GDP. Also, the U.S. tax gap appears
modest compared to other countries. But we can reduce the tax
gap by cutting tax rates, improving IRS services, and
simplifying the tax code.
So my bottom line is, I think that with the $79 billion in
new IRS funding, some of that ought to be moved back away from
enforcement activities and more towards the taxpayer services
and the IT investment that the IRS is promising in their new
strategic plan.
Thank you very much.
[The prepared statement of Mr. Edwards appears in the
appendix.]
The Chairman. Thank you very much. All of you have been
very helpful, and I am going to start with you, Mr. Fort. You
were, from 2017 to 2020, Chief of Criminal Investigation at the
IRS; is that correct?
Mr. Fort. Correct.
The Chairman. So recently, we learned about how this
particular part of the IRS collaborated with other law
enforcement agencies on the biggest fentanyl distribution
takedown in American history: hundreds of arrests, seizure of
millions and millions of dollars, 850 kilograms of drugs. I
mean, this was the equivalent of millions of lethal doses of
fentanyl.
And the office that you headed up was a key part of
enforcement efforts from 2017 to 2020. So House Republicans now
want to cut these IRS enforcement measures that we included by
over $45 billion. Now, they swear up and down that they are for
law enforcement, but with respect to the people, the agents, we
should be doing more with less.
So, when it comes to investigating complex financial
crimes, the kind of work you did, the kind of work recently
that the office where you were was part of in this whole
effort, what are the implications of trying to go along with
this Republican mantra, in the criminal area, of doing more
with less?
Mr. Fort. Thank you for the question, Chairman Wyden. As I
mentioned in my opening statement, IRS Criminal Investigation
has a very broad jurisdiction of tax crimes. But also--as you
mentioned and I mentioned in my opening comments--a very
important relationship with the Department of Justice and other
Federal agencies, investigating child exploitation, narcotics
trafficking, the opioid epidemic.
Less money, less funding means less cases. And for the
criminal side of the IRS, that means less tax cases, less
sophisticated international tax cases, but also less
involvement in the cases that you mentioned, this critical
involvement with U.S. law enforcement investigating serious
narcotics crimes including the opioid epidemic, terrorist
financing, sanctions investigations, and a whole host of other
priorities for U.S. law enforcement.
The Chairman. Let me ask you about another one, and that is
offshore tax evasion. I am very pleased that our investigative
staff exposed just how a few American families were hiding
hundreds of millions of dollars at Credit Suisse, and how one
U.S. software executive managed to hide an astounding $2
billion in income offshore for more than a decade.
Part of the reason why is, Republican budget cuts hamstrung
this enforcement program from the get-go. In 2021, there were
seven criminal investigations opened into offshore bank account
violations. That number strikes me as preposterously low--
preposterously low given the magnitude of offshore tax evasion
out there, which has been estimated at about $15 billion per
year.
Again, let us hear about how the Republican mantra, doing
more with less, is going to help us figure out where these
wealthy tax cheats are hiding money offshore. It does not seem
to me that what the Republicans are talking about is going to
be helpful as we try to get the very people that we recently
exposed.
Mr. Fort. So, it's another great question. There is
tremendous work left to be done on international tax
enforcement--on the criminal side and the civil side. Again,
this work is critically important to what the IRS does.
There are more cases than the seven that you cited. There
are many international cases, but there is so much more work to
be done, and in cooperation with the civil side of the IRS--
there are sophisticated schemes. More and more, it is very
typical for IRS criminal investigations to involve some type of
an international component.
These cases are incredibly manpower-intensive; they are
typically multiagency investigations led by the Department of
Justice that require legal processes to get evidence and
witnesses from overseas. So, there is a lot more investment
that could be made, and many more cases that can be worked in
this area.
The Chairman. Let me ask one question of Dr. Sarin. We have
appreciated all of the input on issues you have given us over
the years. What do you think about this idea of auditing
wealthy tax cheats, and somehow the Republican argument is
going to get it done, with the IRS doing more with less? We
have had now two specific examples--this huge fentanyl
takedown, the Credit Suisse effort that Mr. Fort has talked
about--talking about doing more with less.
What do you think the consequences of these cuts are in our
effort to really go after the issue that you and others have
been looking at for years, which is--we have the information on
middle-class people. You know, they pay taxes with every
paycheck. It is these wealthy tax cheats we have got to zero in
on. Your thoughts about doing more with less as the Republicans
are talking about?
Dr. Sarin. Yes. Thanks, Chairman Wyden. The reality is, the
IRS cannot do more with less, and let me give you another
precise example with respect to complex partnerships. In 2019,
the IRS opened audits of 7,500 partnerships. It received more
than 4 million partnership returns. That is an audit rate of
.05 percent. The reality is, this is a signal to taxpayers that
the IRS is simply outgunned. It has no capacity, and those who
want to evade do so freely.
What these resources are going to mean for the IRS--and
what not having these resources will mean for the IRS--is that
finally, the agency is going to have the capacity to hire the
people required to pore through thousands of pages of
incredibly complex structured, tiered partnerships that are
owned by tiered partnerships, and designed as such precisely to
be opaque in ways that are impossible to pierce, and to allow
for evasion.
The Chairman. Thank you very much. All of you have been
excellent.
I am just going to close with this. I am over my time, but
Mr. Sepp talked about guard rails. We are all for guard rails.
What I think you have said, Mr. Fort, and you have, Dr. Sarin,
is that the McCarthy budget would do a lot more to unravel our
ability to take down the wealthiest tax cheats.
It is not about guard rails in that McCarthy budget. It is
about unraveling the ability to take them down.
Senator Thune?
Senator Thune. Thank you, Mr. Chairman.
Mr. Sepp, you--given the overwhelmingly disproportionate
funding towards enforcement activities compared to taxpayer
services, would you agree that some of the IRA enforcement
funds could be more effectively spent on improving customer
service, and could you just elaborate on that point a bit?
Mr. Sepp. Thank you, Senator Thune. Yes, certainly they
could. And the problem with the nine paragraphs in the
Inflation Reduction Act that described how the IRS money will
be devoted to various functions, I think it fails to account
for overlap in the taxpayer services category, for example.
It specifies that certain amounts of funding will go to
Taxpayer Advocate services and the enforcement side. Certain
amounts of funding will go to litigation. In the IRS strategic
operating plan, in the enforcement section, there is an item
describing how the Service wants to put more people into
appeals.
You have overlaps among the funding that we do not really
understand yet, and I think we need to consider holistically
that, yes, taxpayer services and other items can increase
compliance.
At a recent symposium by the Tax Policy Center, Nina Olson,
the former National Taxpayer Advocate, said we are good at
measuring noncompliance, or at least we think we are when it
comes to audit rates and the like. What about compliance when
taxpayer services improve?
We have not measured that impact sufficiently. I think one
of the most telling quotes came when Ernie Dronenburg, who was
a former revenue official from California, made the equation
this way. A 0.5-percent increase in voluntary compliance raises
$400 million a year for his State. Doubling the audit rate
raises half that much.
Senator Thune. So, would having the IRS update its IRS
spending plan annually and requiring regular oversight hearings
before the relevant committees of jurisdiction provide some of
the greater accountability of the $80 billion in funding that
we are talking about here, and maybe if so, can you talk about
how?
Mr. Sepp. Well, I think that Congress cannot go at it
alone. There certainly has to be a series of reports set up for
the agency to describe in detail where the money is going, and
answering this question of how exactly this funding for
auditing high-income individuals is going.
There is of course the Criminal Investigation division,
whose funding is very important, but Commissioner Werfel
himself has said their hires for CID will be somewhere around 3
percent of the total they intend to hire. If we want to keep
funding CID, that is a pretty minor amount of increase. We can
do that.
There are other things, though, that have to come along
with it, like preparing the IT infrastructure for going after
cybercriminals. The Treasury Inspector General recently said
that the IRS failed to meet 17 of 20 standard cybersecurity
criteria developed
government-wide.
If we are going to be dealing with the worst of the worst
in cybercriminals going forward, we need to have a secure
infrastructure that is not going to be hacked.
Senator Thune. And the oversight and accountability that
come with it.
So, Mr. Edwards, in your testimony you state that the IRS
estimates show that the tax gap is not rising relative to size
of the economy, and the U.S. tax gap appears to be moderate by
international standards. Could you elaborate on how the U.S.
tax gap stacks up against other countries, including those in
the EU?
Mr. Edwards. There are a number of studies internationally.
It is difficult to compare tax gaps between countries. Few
countries do a detailed tax gap like our IRS does. But there
are five or six studies I cite in my testimony that look at tax
gaps across European countries and the United States.
Generally, our tax gap is lower as a share of GDP, which is
a little surprising. I mean, Europe relies a lot on VAT taxes,
which are actually easier to force compliance with than income
taxes. And our tax gap has not increased over time.
You can look at IRS tax gap estimates back a few decades,
and the tax gap has not increased. The important point with
enforcement, I think, is that it is not all black and white.
But there are diminishing benefits when you increase
enforcement.
There is a fascinating chart in the GAO study last year on
enforcement that shows if you look at people earning over $5
million, today when they are audited, 40 percent of them have
no tax change. A decade ago when the audit rate was higher, 60
percent of them had no change.
So, if you expand the auditing on wealthy people in this
case, you make more errors. You go after a lot more people who
have not cheated, who have not made errors. You know, one of
the reasons is a lot of high-income folks, they hire expert
CPAs and CPA companies who do not want to make mistakes. They
have their reputations on the line.
If you look at the auditing data in the annual IRS Data
Book, the folks at the top end actually on audit, their
mistakes are smaller relatively than people in the middle. So I
think it is a bit off base to say that there is all this
cheating going on at the top end.
Of course, there is some. We need to enforce it. But the
relative error and cheating at the top end is smaller actually
than in the middle and at the bottom.
Senator Thune. Thank you, Mr. Chairman. My time has
expired.
The Chairman. Senator Grassley is next.
Senator Grassley. Mr. Edwards, we hear from people at the
administration that nobody under $400,000 is going to be
affected by all this additional money we put into the IRS. But
at a recent hearing, Commissioner Werfel stated that this
threshold will be based on total positive income, which is a
measure of income that excludes losses.
So, won't basing the audit threshold on total positive
income result in significantly larger audit pools than if the
IRS used adjusted gross income or taxable income? Isn't this
particularly true for small business owners?
Mr. Edwards. Right. So, the administration has promised
that they will not increase audit rates for folks who earn
under $400,000 a year. But my understanding is, the IRS uses
the total positive income metric to target their normal
auditing.
So, when the Commissioner says that, uses the $400,000, he
is actually talking, as you said, about a broader pool, mainly
small to mid-size businesses that actually may have AGI under
$400,000, but if they are looking at positive income without
losses, you are going to get a much bigger pool.
I have not done the math to figure out exactly how many
returns that is, but there will be a broader pool of businesses
that are audited than just thinking about the $400,000 as if it
was AGI.
Senator Grassley. Mr. Sepp, I was a member of the 1998 IRS
Restructuring Commission. In that act, the IRS received
multiple years of funding to upgrade its information
technology. This funding was supposed to enable the IRS to
replace its outdated Individual Master File and Business Master
File, which still used technology dating back to the 1960s.
However, that attempt was plagued by cost overruns, lack of
functionality, and to this day the legacy system persists. What
steps could be taken, whether by IRS or Congress, to ensure
that we do not end up 2 decades from now with the same legacy
systems?
Mr. Sepp. Well, thank you, Senator. The Individual Master
File is probably the central core of IRS data that needs to be
upgraded and replaced. The Commissioner has set a very
ambitious goal of trying to do that in the next few years. That
could very well get delayed.
We saw a $4-billion attempt in the late 1980s and early
1990s to try and update IMF. There was the enterprise case
management system, where IRS basically ignored the advice of
technological experts who were saying, ``You are focusing on
the wrong kind of contract and the wrong kind of upgrade.''
I would say that, even though the IRS now has a CIO, a
Chief Information Officer--we have an acting one right now,
which is not ideal. You should really have a permanent one in
place. But I would refrain that having consistent managerial
oversight through something like the IRS Oversight Board that
you and my boss worked on in the IRS Restructuring Commission
would be ideal.
In fact, I know that there has been work done behind the
scenes with members of this committee to try and make sure we
never have this quorum problem with the Board again. That would
be well worth looking at, to make sure we have managerial
consistency when these upgrades are made. Frankly, there is not
enough money for business systems modernization in the IRA
funding mix. The projections are, we will burn through about a
third of that before another 2 fiscal years have passed.
That money is not going to be around for the upgrades, and
it is a key foundation for everything else the IRS wants to do.
Senator Grassley. Mr. Edwards, we often hear from people
who are behind this massive amount of money that is going to be
given to the IRS, that anyone who is not a tax cheat has
nothing to worry about from increased IRS enforcement. Even if
an audit results in no additional taxes due, a taxpayer can
still spend countless hours and incur significant costs
responding to the IRS.
Can you discuss the costs and burdens an IRS audit imposes
on even an innocent taxpayer?
Mr. Edwards. Well, that is right. That is one of the
downsides of increased enforcement: that the IRS makes lots of
mistakes. And you know, I cited the statistic, for example,
that if you look at Tax Court cases over the last 5 years, the
IRS gets it wrong about half the time.
They only get--the Court decides that the IRS only gets
about 48 percent of the money that they had demanded. And that
is after the audit and appeal. These cases are brought to
court, and the IRS only gets about half of the money. So there
are a lot of false positives, I guess you could say, in IRS
enforcement.
The more enforcing you do, the broader the pool of
enforcement, the more mistakes the IRS is going to make. It
causes, especially for 30 million small businesses, a lot of
headaches and wasted time and effort defending against the IRS
when people have done nothing wrong.
So, I had my own issue with the IRS that lasted--it took me
about a year to handle. I had to hire lawyers, and I found out
through that process that the IRS makes lots of mistakes. They
misfile forms. The groups within IRS do not talk to each other.
You cannot get anyone on the phone.
I could have resolved my issue in 15 minutes on the phone
with an IRS employee. I had to hire a law firm, spend thousands
of dollars to get the problem solved. I ultimately had to get
the National Taxpayer Advocate to come to my aid, and we solved
the problem.
But it just struck me that a lot of this is actually not--
it does not have to do with money. It has to do with management
in the IRS sharing data, having a common database, being able
to call and get someone on the phone--like an airline
reservation system, where they have your information in front
of them--and being able to solve the problem a lot faster.
The Chairman. The time of my colleague has expired.
Senator Carper is next in order of appearance.
Senator Carper. Thanks, Mr. Chairman. I did not realize I
timed my arrival this well. We have a lot of hearings going on
today, the run-up to a 2-week recess, and I think every
chairman of a committee is trying to make sure they have their
hearings done today and tomorrow as well. But we are grateful
for you to be here, and I have a special interest in these
issues. It goes back a long way.
But thank you for joining us today, and as someone who
cares deeply about fiscal responsibility, I care about customer
service. I care hugely about customer service. When I was a
little boy, I used to go back to West Virginia to my aunt and
uncle's supermarket just off of the turnpike in Beckley, WV
called Patton's Market.
You'd go into that store, and it would say ``Welcome to
Patton's Market, friendliest store in Beckley.'' My grandfather
was a butcher. My aunt and uncle ran the place, and if you
walked in that place, man they knew your name. If you needed a
special cut of meat, my grandfather would get it for you.
If you needed home delivery, they would deliver. If you
needed to charge it--this is before credit cards--they would
charge it. But I learned a whole lot about treating other
people the way you want to be treated. There is a great quote,
I think it was Mark Twain: ``People do not care how much you
know until they know how much you care.''
Isn't that a great--no, it was Teddy Roosevelt. That was
Teddy Roosevelt. It is not a likely quote you hear. ``People do
not care how much you know until they know how much you care.''
When I was Governor of Delaware, the Delaware Division of
Revenue--which basically was the State version of the IRS--my
last term, they won the Delaware Quality Award for best service
of any government or nonprofit or business in the State.
So I highly valued, and I still highly value customer
service. But I want to talk a little bit today, or ask you to
talk a little bit today about the fiscal impact of cutting
investments in the IRS rather than reducing our deficit. The
repeal of the IRS funding in Speaker McCarthy's bill would
unfortunately actually add nearly $120 billion to the deficit.
It should not be a partisan issue to support the idea that
people should pay the taxes that they owe. That is especially
true for corporations and wealthy individuals, which make up a
large share of the tax gap.
Dr. Sarin, how does funding for the IRS bolster the fiscal
health of our Nation, and how would the repeal of these
investments I just alluded to impact taxpayer compliance?
Dr. Sarin. Thank you for the question, Senator Carper. As
you mentioned, the CBO has sort of commented on this question
and has remarked that the IRA would raise nearly $200 billion
in new tax collections, or around $115 billion net of the IRA
investment over the next decade.
I have a new paper out with former Assistant Secretary for
Tax Policy Mark Mazur this week that addresses this question as
well, and we conclude that while directionally definitely
right, we think that the IRA investments are likely to raise
much more, around $560 billion over the course of the next
decade, and around $1.5 trillion over the course of the next 2
decades.
The reason for that is that, as the IRS starts to build up
enforcement capacity in these areas that you speak of, Senator
Carper, global high-net-worth, complex partnerships, high-end
evasion, where they essentially have no capacity today, what
you are going to see is direct revenue coming in from those
enforcement activities.
But what you are also going to see is, you are going to see
taxpayer behavior adjust very substantially for these
investments. And particularly for taxpayers who make errors
that are identified by the IRS, we know they are unlikely to
make those same errors in future years. There is also a
community deterrent effect when taxpayers and tax preparers
realize that the IRS is on the beat. They adjust their behavior
accordingly and are more compliant voluntarily.
Senator Carper. Thanks.
One more quick question if I can. This tax filing season,
we have already seen tremendous progress in the ability of the
IRS to provide good customer service for taxpayers. It is
really encouraging.
In fact, during the 2023 filing system, I think the agency
was able to answer nearly 90 percent of phone calls. I have a
friend who says, ``Compared to what?'' Well, compared to a year
ago, when I think it was like 16 percent of calls being
answered. So that's a huge improvement, and I think it is due
in large part to the investments we have made in the IRS.
A question for you, Dr. Sarin. Can you talk just briefly
about--and you have already on this a little bit--just a bit
more about what the repeal of this funding would mean for
customer service that the IRS provides to everyday taxpayers
seeking support? Thank you.
Dr. Sarin. And it is entirely because of the investment you
made. So the IRS was able to hire 5,000 new people to be on the
phones. The level of service grew to 87 percent from 15 percent
in 1 year. The IRS was able to digitize thousands more forms
this year. The IRS cut phone wait times from 27 minutes to 4
minutes.
This filing season is proof in concept of what a resourced
IRS is going to be able to deliver for taxpayers. But we are
not at the level of customer service that your market is able
to provide just yet. What the agency needs to do over the
course of the next few years--and what you see them allude to
in the strategic plan--is invest in taxpayer service that
allows the IRS to meet taxpayers where they are.
So that means phone service. It also means in-person
assistance at Taxpayer Assistance Centers. But what it also
means is, you should be able to communicate with the IRS
digitally and instantaneously if you want to on your phone, the
way you can communicate with your financial institution today.
Senator Carper. All right. Yes, thanks for the time.
The Chairman. The time of my colleague is up.
Senator Johnson?
Senator Johnson. Thank you, Mr. Chairman.
Mr. Edwards, first of all, I agree with you. I think the
overall solution here is to simplify our tax code. That would
solve all the problems. That is the root cause: a very complex
tax code. I fear that the $80 billion is just an $80-billion
band-aid. It is not going to work.
And of course, what I am concerned about--I expressed this
with Commissioner Werfel as well--is that the $80 billion will
not be spent in an impartial way. I am highly concerned about
partisanship in these Federal agencies, law enforcement and the
IRS, and we've got two examples.
Mr. Chairman, I hope we can get your cooperation with
trying to extract information on the IRS visit to, for example,
journalist Matt Taibbi. We got a response. It was a
nonresponsive response, but we will continue to follow up on
that.
But I want to talk about another thing that just popped up
in the news in terms of partisanship. Mr. Chairman, you
received a letter, together with Ranking Member Crapo and
Senator Grassley, from the attorney for an IRS whistleblower
who is claiming partisanship in a high-profile IRS
investigation.
They are asking for whistleblower protection, and they are
asking to be interviewed, and my understanding is that they do
not want to be interviewed by the House and the Senate. They
would like to do it one time. I have a request that you
cooperate with their request. I would ask that you enter this
letter into the record. Mr. Chairman, can you enter this letter
into the record?
The Chairman. Without objection, so ordered.
[The letter appears in the appendix on p. 57.]
Senator Johnson. And I would also ask, if we do arrange
that interview, I would like to be part of that interview. I
would like to be present when we interview that whistleblower,
because the news reports widely are assuming that that is
Hunter Biden, and of course the chairman is always talking
about wealthy tax cheats.
Well, let us describe a wealthy tax cheat. Hunter Biden
became a board member on Burisma in April or May of 2014. Three
years later, his financial advisor, business partner of the
family, the Biden family financial advisor, Eric Schwerin,
sends him an email saying, ``Hey, Hunter, you understated your
income by $400,000 in 2014.'' I mean this is 2 or 3 years
later, right?
Now eventually, Hunter Biden paid about $2 million of
delinquent taxes, but he did not pay them. A Hollywood attorney
named Kevin Morris made that payment in May of 2022, 5 years
after Mr. Schwerin told him that he underreported income by
$400,000. Well, he must have underreported income by a lot more
than $400,000 if he is making a $2-million tax payment.
So the concern we have now, according to this letter, is
that the entire IRS investigatory team has been pulled off the
Hunter Biden case. My question for you, Mr. Fort, is, in your
time in the IRS, in the investigatory division, the Criminal
Division, was there ever another instance when an entire IRS
investigatory team was pulled off a tax case?
Mr. Fort. Thank you for the question, Senator. So yes, I
spent 30, almost 30 years with IRS Criminal Investigation. I am
not aware of a situation such as that. But again, when I
retired from the organization at the end of 2020, I was in
charge of about 3,000 people, including 2,100 agents, so I
cannot say with certainty whether or not that happened.
Senator Johnson. So again, we have a whistleblower here. He
is seeking whistleblower protection. Sounds like the House has
granted that. I am not sure what the Senate is doing, and this
is the committee of jurisdiction. I hope you grant
whistleblower protection and cooperate in an interview with
this whistleblower, because we need to find out this
information claiming partisanship in the Hunter Biden
investigation.
And now, the fact that the Justice Department has removed
the entire investigatory team off of the case, that just smacks
of partisanship and erodes the American people's confidence
that the IRS will be fair and impartial and administer justice
in the tax code equally. Do you agree that that erodes
confidence in the IRS, this recent revelation?
Mr. Fort. So, even though I have been gone from the
government for 2 years, Federal law prohibits me from
discussing any specific taxpayer at all. But I would just agree
that it is a serious allegation.
Senator Johnson. Well, again, having an entire IRS
investigatory team pulled off of any case would certainly get
you scratching your head, right, highly concerned about what is
pulling off here?
Mr. Fort. Again, in my experience--you know, I am not
personally aware of a situation such as that, but it does not
mean it did not happen during my tenure.
Senator Johnson. Okay. And again, Mr. Chairman, I would
also like your cooperation in my request for information from
Commissioner Werfel on Matt Taibbi. We are going to try to get
from Mr. Taibbi a release to have the IRS release those
records, because right now the IRS is claiming it cannot do
that.
We also asked, by the way, general questions, which the IRS
also did not respond to. So, I am going to need your help if we
are going to get to the bottom of that potential partisanship
within the IRS.
The Chairman. I am going to respond when you are done. You
are just over your time. Are you done?
Senator Johnson. Yes.
The Chairman. Great.
I am aware of the matter that Senator Johnson has brought
up. As has been my practice on 6103-protected matters, I have
been pursuing this issue on a bipartisan basis here with
Ranking Member Crapo, and we are going to continue to do so.
Given 6103 and the sensitive nature of the information for
all involved, there just is not anything more I can say about
it now.
Okay. Senator Daines is next.
Senator Daines. Mr. Chairman, thank you. I would like to
begin my time by addressing the flawed notion that the
Inflation Reduction Act's $80 billion in supplemental funding
to the IRS will somehow spare ordinary Americans from increased
audits.
For years, my Democrat colleagues have called for the IRS
to reduce the tax gap, the difference between total taxes owed
and collected by targeting wealthy tax cheats. Fortunately, we
still have some common sense in Montana. Montanans know that
the most dangerous words in the English language are: ``I'm
from the IRS, and I'm here to help you.''
They know the IRS cannot handle the workload it currently
has, so adding more money to enforcement before we get folks to
answer the phones is fruitless. The other problem is, low- to
middle-income earners represent the major source of
underreported income.
According to the nonpartisan Joint Committee on Taxation,
as much as 90 percent of the money raised from underreported
income would likely come from those making less than $200,000 a
year, with only 4 to 9 percent coming from those making more
than $500,000. Again, that is from JCT.
The nonpartisan GAO also found that most of the revenue
generated from audits over the last decades has come from
returns with incomes below $200,000. In fact, when given a
chance to guarantee the IRS could not use additional funding to
audit taxpayers earning less than $400,000, every Senate
Democrat voted against it.
With nearly 60 percent of the IRS's supplemental funding
going to tax enforcement, audits are unfortunately coming for
Americans at all income levels. More aggressive IRS enforcement
is likely to increase cost for honest taxpayers who are forced
to spend time and a lot of emotional energy defending
themselves against erroneous audits.
Mr. Edwards, in your testimony you state, and I quote,
``IRS auditing imposes collateral damage because many audited
taxpayers have paid the correct amount.'' What are some of the
external consequences that taxpayers face as a result of the
IRS's increased enforcement?
Mr. Edwards. We all want to increase compliance rates and,
you know, there are two ways you can do it. You can improve the
IRS. You can keep tax rates low. You can simplify the tax code.
All of those strategies would save taxpayers money, and you
would increase compliance.
Yes, you could increase compliance with higher audit rates,
but as you said, there would be collateral damage on the many
people who get audited, go through all the anguish, the lawyer
costs, and all that financial uncertainty, and they paid the
correct amount.
And as I said, in a GAO study on auditing last year, they
have a chart showing a decade ago when audit rates were higher
on the top income category above $5 million, 60 percent of the
time there was no change on audits for those taxpayers. Meaning
the IRS, even though they target with algorithms, they made a
mistake 60 percent of the time and went after the wrong people.
So, I do not know what the exact audit rate is, but the more
you audit, the more mistakes the IRS will make.
Senator Daines. Mr. Edwards, in your testimony, you touched
on this, on the prevalence of so-called ``no change audits,''
in which the IRS audits taxpayers, only to find out that they
paid the correct amount. In fact, you stated that for
individuals earning more than $5 million, the no change rate is
just under 40 percent.
Meaning, in 40 percent of these cases, the IRS is expending
time and resources forcing individuals to exhaust their own
time and resources for no reason. Mr. Edwards, the Biden
administration has said that the enforcement budget will only
go towards auditing high-income taxpayers.
I think it was already demonstrated that this is, at best,
a flimsy claim. But let us say it is true for a moment. Is it a
really good outcome for anyone besides tax attorneys to have
the IRS increasing taxpayer costs and stress by forcing them to
defend themselves in these audits?
Mr. Edwards. That is right. So that is a GAO statistic,
that for the very top-end people, 40 percent of audits, there
is no change. Even the returns where there are changes, a lot
of those get abated. Some of them go to Tax Court, and in Tax
Court, as I noted, the IRS only has about a 50-50 batting
average.
So there are a lot of people--the more you audit, there are
a lot of people who have to go through a lot of time and
expense and financial anguish and lawyer fees to defend
themselves when they have done nothing wrong.
The Chairman. The time of my colleague has expired.
Senator Casey is next.
Senator Casey. Thank you, Mr. Chairman. I want to thank the
witnesses for being here for your testimony.
I want to start with Dr. Sarin. We are grateful for your
presence here today, and I wanted to specifically talk about
the question of performance and what has happened just in our
recent history.
You mention in your testimony the IRS has increased its
customer service performance 315 percent over the year,
answering 2 million more calls this year and serving 100,000
more taxpayers in person. The IRS has also digitized returns,
cleared paper backlogs, and reduced processing times on tax
returns.
That means, obviously, more taxpayer money is getting back
into families' pockets. If the Congress were to cancel the
increase in IRS funding, as House Republicans have proposed,
what would happen to, number one, in-person taxpayer services
and, number two, call wait times for people in Pennsylvania,
for example?
Dr. Sarin. Well, call wait times would rise. Last year,
without the IRA funding, call wait times averaged 27 minutes.
This year, they average 4 minutes, and that is a direct result
of your investment.
What would also happen is that in-person assistance at
Taxpayer Assistance Centers would decline. It declined over the
course of the last decade by 50 percent, disproportionately
because the IRS was forced to close Taxpayer Assistance Centers
in rural, low-income communities because it could not afford to
staff them.
This year, it did a terrific job in increasing that in-
person assistance, but there is a ways to go, and these
investments are so, so critical. They are also critical in
enabling taxpayers to have real-time access to the IRS, and
real-time digital access to enable them to have their tax
questions answered more quickly, and to quickly resolve any
issues with the agency.
I know this is the direction that all of your constituents
want the agency to go. They now finally have the resources to
do it.
Senator Casey. Thank you, Doctor.
I want to turn to Mr. Fort, and I am grateful for your
public service as Chief of IRS Criminal Investigation.
Over the last decade, IRS Criminal Investigation has lost a
quarter--one-quarter--of its special agents, who do the work of
investigating criminal violations, dismantling terrorist
financing operations, and recovering billions in stolen assets
for American taxpayers. The House Republican proposal would
make sure we never rehire those Criminal Investigation agents.
You have personally had a hand in some of the most high-
profile investigations at the IRS, like when two Chinese
nationals were charged with laundering $100 million after
hacking a cryptocurrency exchange. I want to ask you first
about the special expertise that the IRS brings to criminal
investigations. What kinds of criminals are able to escape
justice when we defund the IRS?
Mr. Fort. Thank you for the question, Senator. So, IRS
Criminal Investigation has very broad jurisdiction. I will
direct the question primarily to the multiagency investigations
that IRS Criminal Investigation works, such as the case that
you mentioned, child exploitation, many narcotics
investigations around the country.
The IRS is in high demand. The resources of IRS Criminal
Investigation are in high demand with the Department of Justice
and other agencies. It is really a multiagency effort, where
every agency brings their skills to the table, and it is the
skills of IRS special agents in following the money that are so
critical in solving these Federal crimes.
Senator Casey. Well, I appreciate it, and how many--just
for purposes of the record, how many years have you done this
work?
Mr. Fort. I did it for a little over 29 years.
Senator Casey. Thank you.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
Senator Blackburn is next.
Senator Blackburn. Thank you, Mr. Chairman, and thank you
all for being with us today.
So, the IRA gives the IRS an additional $80 billion, and
you have additional funding that is on top of the $13.6 billion
it received in annual appropriations in 2022, and about 60
percent of this funding is designated for enforcement actions.
And so, Dr. Sarin, you wrote an article in The Washington
Post saying that this is not enough. So how much do you think
would be enough? Where do you peg that number? When does
government get enough of the taxpayers' money, or do they ever
get enough?
Dr. Sarin. Thank you so much for your question, Senator
Blackburn. I really appreciate it, and a point that I think is
important to emphasize is that these $80 billion, this $80-
billion investment in the agency is about transforming the IRS
into a 21st-century tax administrator.
It is about creating modern IT structures so that IRS
employees are not hand-transcribing returns. What they are
doing instead is scanning them digitally and automatically when
a----
Senator Blackburn. So, you think they need even more money
on top of what they have gotten, so that they can audit more of
the American people, and use technology to delve into those
audits.
Mr. Sepp, I want to come to you. In a letter that the
National Taxpayer Union wrote to Congress last year before the
passage of the IRA, a section was included that speaks to what
would happen if the IRS received increased enforcement funding,
with the goal of aggressively pursuing increased revenue.
When I talk to Tennesseans, they do not agree with Dr.
Sarin. They think the IRS has too much of their money as it is.
The letter goes on to say, and I quote: ``Taxpayers would be
right to ask, would the agency first direct their efforts at
expensive, time-
consuming in-person audits of wealthy taxpayers and
corporations, potentially facing legal challenges in the
process, or would the IRS devote its time and manpower to
additional correspondence audits from underresourced low- and
middle-income taxpayers?''
Now of course, we know the IRS has only 50 to 55 percent of
their personnel who are working in person. The rest of them are
still working remotely, and if we also take into consideration
that the Biden administration has chosen to keep audit rates at
2018 levels, that, according to the 2022 IRS Data Book, would
still lead to over 262,420 taxpayers making less than $25,000
per year being audited.
So, do you believe that it is a valid concern for taxpayers
that I hear from all the time, that they are concerned that the
IRS is going to use this money as a slush fund to target them,
to target small business people, and to cause them a lot of
extra expense as you were just discussing with Senator Daines?
Mr. Sepp. Well, thank you, Senator. A lot to unpack there.
I would just say first, we have the notion that innocent people
have nothing to fear from heightened enforcement activities.
That----
Senator Blackburn. But sometimes it costs them to prove
their innocence, because the IRS many times considers them
guilty----
Mr. Sepp. That is right----
Senator Blackburn [continuing]. Unless they can prove
that----
Mr. Sepp. That is right, and we would never be making that
statement with any other area of law enforcement, in my
opinion. We would be saying ``trust but verify.''
Senator Blackburn. Right.
Mr. Sepp. And in this report, of course, if you read the
IRS's strategic operating plan, they are very careful to point
out in the enforcement section where they are talking about
limiting audits at the $400,000 TPI and up level, versus broad-
based enforcement efforts that are going to affect all
taxpayers----
Senator Blackburn. But as we have heard from Commissioner
Werfel, that is going to be what he terms positive income,
which is everything. That is your gross.
Mr. Sepp. Yes.
Senator Blackburn. That is not your net-net. That is your
gross. That gets a lot of moms and pops.
Mr. Edwards, do you have anything to add to that?
Mr. Edwards. I agree with what Pete said. There is a heck
of a lot of good stuff in the strategic operating plan
regarding taxpayer service and technology. I think both sides
can win. Taxpayers can win. We would all win if there is
oversight on the IRS, to make sure that those promises are
fulfilled.
We can save taxpayer money by investing in taxpayer
service, holding their feet to the fire, making sure they make
those customer service changes. It would be good for all of us.
I would also say there is a lot of stuff in the strategic
operating plan that actually should not really cost money.
I mean, there is a whole page in there on saying that forms
and notices should be in plain language. Well, they should be
doing that already. They should have been doing that for years,
and as someone who has received some of those notices over the
years, I can tell you, they are hard to read, which makes no
sense.
Senator Blackburn. And it requires you to get an attorney.
Mr. Edwards. Absolutely.
Senator Blackburn. Which is costing you money, compliance,
and you have done nothing wrong. We hear it from Tennessee
businesses all the time.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague. I heard you say the
strategic operating plan had plenty of good stuff in it. I
heard it loud and clear.
Senator Whitehouse.?
Senator Whitehouse. Thank you very much, Mr. Chairman.
Mr. Fort, I think we have talked a bit about what IRS--I
used to call it CID when I was U.S. Attorney. And by the way,
you were all terrific to work with. It was really an impressive
law enforcement agency, so thank you for your service there.
We have heard about a number of the areas in which the
criminal investigation work of the IRS takes place. Would it
also include terrorist financing?
Mr. Fort. Thank you for the question, Senator Whitehouse.
Yes, it would.
Senator Whitehouse. And international money laundering?
Mr. Fort. Correct.
Senator Whitehouse. And sanctions evasion, for instance by
Russian oligarchs who park money in the U.S. and other places?
Mr. Fort. Yes.
Senator Whitehouse. Thank you.
Dr. Sarin, I think you are familiar with the 501(c)
programs of the tax code?
Dr. Sarin. I am.
Senator Whitehouse. What is the status of 501(c)
enforcement right now at the IRS?
Dr. Sarin. Well, Senator Whitehouse, I think this is an
incredibly important area, and it is one like much of what we
have talked about, like partnerships, like global high net
worth, where the IRS has had resource constraints. They just
have not been able to invest in this work.
It is part of what I think is so important going forward,
because really investing in a tax administrator that is able to
have a real enforcement presence across the code is kind of
central to our democracy. It is central to the functioning of
American society.
Right now, we live in a world with a two-tiered tax system,
where the vast majority of their constituents are doing exactly
what the IRS requests of them. But disproportionately, those on
the high end are choosing not to, and disproportionately,
certain organizations and large corporations and complex
partnerships are causing the IRS to be in a situation where
they are not complying with the law, and that is why this is so
important.
Senator Whitehouse. Specifically, 501(c)(3) and 501(c)(4)
organizations, they are required to operate within fairly
precise legal constraints, are they not?
Dr. Sarin. That is correct.
Senator Whitehouse. But there does not seem to be much
enforcement happening to keep them within those bounds set by
Congress. Is that also correct?
Dr. Sarin. And this is an area where I know you have
discussed this with Commissioner Werfel as well. This is an
area where, and the analogy he used with you, I think, was, the
IRS needs to have refs on the field in order for the rules to
be followed and the game to be played.
I think this is an area where there is a considerable role
for both Congress and the IRS to play, in making sure that we
invest in the importance of enforcement and following the
rules.
Senator Whitehouse. Well, it looks like the Wild West, that
the sheriff is sound asleep right now. So I hope that will
change and that these resources will help.
Let us just propose a hypothetical here. Let us say,
hypothetically, that one party of a country was supported by
polluting industries, that it got away with enormous levels of
pollution for free, putting the burden of its pollution on
everybody else in the country, but not paying to prevent or
clean up its own pollution; that as a result, vast fortunes
were created, and that the owners of those vast fortunes deeply
resent being taxed by ordinary people, and therefore set up
complex schemes to hide their income and their assets,
including even overseas.
If you were in that hypothetical as one of those
individuals, would defunding the tax police be a logical
strategy as a part of that operation?
Dr. Sarin. If you were one of those individuals, you
certainly would want an IRS that is not resourced to be able to
pursue you and your tax evasion and your crimes. I suspect--and
it has been kind of disheartening to watch critics of the IRS
line up and so much money be lined up against the IRS's
activities here--that is exactly what you are seeing.
Senator Whitehouse. I could not agree more.
I yield back my time.
The Chairman. I thank my colleague.
Senator Tillis is next.
Senator Tillis. Thank you, Mr. Chair. Thank you all for
being here.
Mr. Edwards, you have written extensively on the subject of
the tax gap, and I think you found that the tax gap has not
grown relative to the size of the economy. I am curious about
that. Can you explain what it means?
Mr. Edwards. Well, you know, every few years the IRS does a
tax gap study. They do it based on what is called the National
Research Program, which is random audits. They take the random
audit information. They sort of gross up the amounts compared
to account for income that they think might be there but they
cannot find, and then come out with their tax gap estimate.
They came out with their most recent one last year. They
found that the tax gap now is around 2.6 percent of the GDP. If
you look at the IRS studies back a couple of decades, frankly
even further, the share of GDP that is the tax gap, tax error
and tax cheating, has been about the same. I mean, it appears
from the official data that the amount of cheating and error on
tax returns is about the same.
You are never going to get it down to zero, and I also
looked at, in my testimony, the information--it is kind of
rough--on what happens in European countries. In Europe, the
tax gap seemed a little higher than the United States. So I
think Americans are generally pretty law-abiding on their
taxes.
Senator Tillis. I was going to ask you about the OECD. I
think you answered my next question, but we are in the same
ballpark?
Mr. Edwards. They are. There are some countries that are
lower than us. Both Canada and Britain--they do detailed tax
gap analysis like we do, and their gaps are a little lower. But
there are a lot of European countries actually that have higher
tax gaps than we do, so we are kind of somewhere in the middle.
Senator Tillis. Okay.
I was here for the opening statement of the chair, and the
IRA and the $80 billion to the IRS--as somebody who has spent
most of my career doing enterprise transformation, here is how
I would describe the IRS. They have a lousy customer service
record. They understand that problem. They are trying to fix
that problem. They have antiquated systems and processes.
And so, I am trying to figure out, and I do think--I voted
for the new head of the IRS, because he has background in
enterprise transformation. I have to believe that he is looking
at this gift of $80 billion and saying, ``Gosh, I wish I could
spend it the way an enterprise transformer would spend it.''
One of the things I would not do is spend $15 million on
creating a government alternative to something that is working
just fine in the private sector called free filing. There are
tens of millions of people currently qualified. If we were
going to put that into something that could expand the
footprint, that makes more sense.
So, the concern that I have with the IRA, unlike how it has
been characterized, is that you are not planning ahead for how
you should transform the IRS. You should take a look at the
performance indicators that need to be fixed and spend the
money that way. Instead, we have said almost double the size of
the IRS. It is not going to all be with agents; it is going to
be spread out. But there are going to be a significant number
of people who are going to be added to an organization that
desperately needs to be modernized and to invest in technology.
And in fact, I think if you were to spend every dollar you
would spend in artificial intelligence to try and find the
cheaters, not the people who made mistakes--we do case work
every day in our office for somebody who is dealing with an
unpleasant customer experience with the IRS, trying to just fix
an error. So let us separate the errors from the cheats, and
get every dime you can from the cheats. But I think we are
using brute force and labor versus a well-thought-out plan, and
I am fully convinced we have leadership that would do it if we
allowed him to.
Do you think it makes sense for us to go in and create a
competitive product for the private sector on free filings? Mr.
Edwards? Anybody who wants to speak.
Mr. Edwards. You know, no. The IRS, in the strategic
operating plan, has an enormous amount of transformation on
their plate that they have got to deal with. It is not just
spending more money. There are management reforms, an enormous
amount, and like I said, there is a lot of good stuff in the
strategic operating plan.
But until they get there, pouring more money into new
endeavors does not make any sense. We need a fundamental
transformation. I must say, you can fundamentally transform
government agencies. I think the current Postmaster General,
for example, is actually doing a very good job in transforming
the Postal Service, and it has a lot of similar problems as the
IRS.
So, we need the transformation first before we go expanding
the----
Senator Tillis. Yes. I wanted to ask questions of the other
witnesses. But that is what happens when you do something on a
bipartisan basis, versus something on a partisan basis. The
Postal Service bill that I supported and worked to get good
support for, had 79 votes. Well thought out. This one, not so
much.
That is why we need to go back, reopen it, try to--even if
you do not change the top-line number, you need to change how
it is spent, what the priorities are, if you are really going
to have a positive impact on the taxpayers.
Thank you.
Mr. Sepp. I would just quickly add, Senator, that in
December of 2022, there was bipartisan legislation being
developed by two committee members here, Senator Cardin and
Senator Portman, that would have created an Office of
Transformation for the Service with better leadership.
The Chairman. The time of my colleague has expired.
Senator Menendez?
Senator Menendez. Thank you, Mr. Chairman.
Time and again, my colleagues across the aisle have
hijacked negotiations to avoid default, in order to extract
spending cuts in the name of fiscal responsibility. It seems a
little hypocritical for me for congressional Republicans to
threaten default and call for spending cuts on the back of
working families, when they depleted the revenue side of the
ledger over the last 5 years.
Dr. Sarin, how much did the 2017 Republican tax law add to
the Federal deficit over 10 years?
Dr. Sarin. Over 10 years, several trillion. It is around $3
trillion.
Senator Menendez. So that is pretty significant. Now, I am
proud I voted for the Inflation Reduction Act, which actually
cuts deficit spending, cuts deficit spending while
supercharging investments in renewable energy. It also provides
resources for the IRS to modernize its IT system, restore
customer service, and hire the personnel necessary to collect
the taxes that everyone, everyone, including wealthy
individuals, legally owes.
So I think that when you give a couple of trillion dollars
away, it is a little disingenuous to then say there should be
all these spending cuts on the backs of individuals, working
families, that will make a difference in our economy.
Over the last 10 years, the IRS budget shrunk by 20
percent, resulting in 20 percent of its workforce being laid
off. While middle-class families and small businesses bear the
brunt of the IRS customer service problems, wealthy individuals
and large corporations are all too happy to take advantage of
the IRS's limitations.
Ultimately, that means less revenue to cover the cost of
our Federal budget. We are already seeing improvements at the
IRS due to the Inflation Reduction Act. Customer service has
significantly improved. The IRS is planning to hire the
personnel needed to ensure that the wealthiest are paying what
they legally owe.
But is the answer to balancing the budget to slash the
critical IRS funding and reverse this progress? Mr. Fort, how
much does the IRS stand to return to the Treasury over the next
10 years due to tax enforcement of the wealthiest individuals
and businesses?
Mr. Fort. Thank you for the question, Senator. You know, I
retired from the government a couple of years ago. I do not
have those exact figures. But the return on investment for IRS
agents, whether it is on the civil or criminal side, is
enormous.
Just the criminal division of the IRS that I worked with
for almost 30 years, just over the last several years
identified many billions of dollars in tax and other financial
fraud.
Senator Menendez. Yes. I have a figure of $120 billion over
10 years. That is an enormous amount of money. Who pays the
price of tax evasion by the wealthiest and large corporations,
Mr. Fort?
Mr. Fort. Well, it is all of the American citizens who are
abiding by the laws.
Senator Menendez. Now, Dr. Sarin, I have led over eight
letters to the IRS about a range of customer service issues. I
mean, at the essence, U.S. taxpayers should expect that you
will answer the phone, you will answer the mail, you will
process returns, at a minimum.
That was not always the case. The IRS consistently now
answers the phones, between 80 and 90 percent of the time, at
an average speed to answer of 4 minutes, compared to previous
times when that was incredibly longer. What would it mean, Dr.
Sarin, for taxpayer customer service if my colleagues had their
way in rescinding the IRS IRA funding?
Dr. Sarin. Well, Senator Menendez, you would go back to the
world as before, where less than 15 percent of calls that were
made during filing season were answered, where phone wait times
were upwards of 30 minutes, where IRS continued a practice that
it called a courtesy disconnect, which essentially knew it was
never going to get to you, so it just would cancel your phone
call when it received it.
Now the IRS has the tools that it needs to be able to
answer customer calls about 90 percent of the time this filing
season. It is going to aim for 100 percent of the time and
instantaneous communications with taxpayers, and that is what
these resources are going to afford it.
Senator Menendez. Yes. Well, I do not think any of my
constituents would appreciate a courtesy disconnect at the end
of the day.
Finally, it is not just IRS funding that our colleagues
want to slash, but other critical government programs to grow
jobs and the economy. Last year, Congress appropriated, for
example, $8 billion to the Child Care and Development Block
Grants. This helps to provide funding for child-care providers,
to support low-income families in accessing child care--to do
what, largely? To be able to go to work, to be productive, to
contribute to the economy.
Dr. Sarin, what would be the impact on families, child-care
providers, and the economy writ large if Republicans insist on
slashing vital funding for child care as a precondition to a
precedent on the debt default?
Dr. Sarin. Well, we have a whole host of empirical evidence
on this question. It means less people able to work, less women
able to work. It means worse outcomes for children in the long
run, and fundamentally, we do not need to do that to address
our debts and deficits. What we can do instead is collect the
taxes that are already on the books with actions like the IRA's
investment in the IRS.
The Chairman. I thank my colleague. The next three in order
of appearance are Cardin, Bennet, and Warner, and I would say
to my colleagues on both sides, we are getting ready to wrap
up.
Senator Cardin?
Senator Cardin. Well, thank you, Mr. Chairman, and I regret
I have not been able to be here for the full hearing, but I
certainly concur in a lot of the comments that have been made
by my colleagues about the impact of the type of cuts that were
in the Republican bill.
One of the things that we want to do is have compliance
with our tax laws, and the funds that were made available
through the Inflation Reduction Act allow us to get a greater
compliance on the tax laws that are on the books. I want to
mention it though from a little bit different perspective, and
that is the fairness to middle-income and lower-income
families.
My information shows that we have a higher compliance on
the revenues from middle-income families and lower-income
families than we do from higher-income families. Secondly, just
from the calls to our office, the service levels at the IRS are
critically more important to middle-income families in
complying with it.
So, if they cannot get a phone call answered, they are
going to be much more at risk than higher-income folks who have
other alternatives in order to understand their tax liability.
So, Dr. Sarin and Mr. Fort, if you could respond from the point
of view of the impact it has on different income levels, the
fairness of our tax code.
It already is not progressive from the point of view of
those who are wealthiest not paying the highest percentages on
their taxes, basically because of so many of the loopholes we
have and lack of enforcement. But how would the repeal of the
IRA funding impact on the fairness to the lower-income and
middle-income families?
Dr. Sarin. Thank you so much for the question, Senator
Cardin. It is an incredibly important one. The vast majority of
your constituents are fully compliant with their tax
obligations. Wage and salary earners' taxes are automatically
withheld.
For high earners who earn income in opaque ways, things
like proprietorship income or rental income, compliance rates
are around 50 percent. So what that means is, today we have a
two-tiered tax system, where the vast majority of low-income
and
middle-income people are paying all that they owe, and wealthy
tax evaders are getting to skirt the rules because the IRS has
no capacity to enforce the laws against them.
That is why the Inflation Reduction Act is so important,
because it finally gives the IRS what it needs to be able to go
and hire people with expertise in partnerships, who are going
to be able to unpack thousands of pages of complex partnership
returns; to hire data scientists and economists, who are going
to be able to leverage the type of information that comes on
offshore bank accounts from the FATCA, and actually deploy it
in their enforcement choices and the ways in which they go
about making sure that the wealthy play by the same set of
rules as everyone else.
Senator Cardin. That 50 percent is kind of shocking. We
know about the trillion-dollar tax gap, right?
Mr. Fort, if you could talk a little bit about the service,
the importance of the IRS being able to provide timely
information to those that are more modest in income, and the
fact that if we do not maintain the funding that we have
provided under the Inflation Reduction Act to improve the
service levels at the IRS, the impact will adversely impact
middle-income and lower-income families.
Mr. Fort. Thanks for the question, Senator, and I
completely agree with Dr. Sarin's comments.
The world in which I lived in the IRS for 30 years was all
on the criminal side. But I agree completely that the bottom
line is, less money means less agents, less service, and less
ability to really pinpoint in on where the work and where the
resources need to be deployed.
Senator Cardin. Thank you.
Thank you, Mr. Chairman. I yield back.
The Chairman. I thank my colleague. The next Senators have
spent a lot of time thinking about these issues.
I am going to call on Senator Bennet and then Senator
Warner.
Senator Bennet. Mr. Chairman, if I could go after Senator
Warner, I would be happy to defer to Senator Warner.
The Chairman. In the parlance of the Senate, they are
yielding to their friends and all the rest. I am happy to do
that.
Senator Bennet. By after, I mean directly after.
The Chairman. Exactly. There is going to be no question
that after Senator Warner will be Senator Bennet.
Senator Warner. That is extremely gracious, and I will make
my question very brief.
I do want to say that I am not really sure that Senator
Cardin was here ahead of Senator Bennet and I, but we both have
such respect for Senator Cardin. You may know that we let him
sit in your chair on the last hearing, and offered the fact
that if he would reconsider his decision not to run again,
maybe we could work out something on a longer-term basis. I
know you rushed back into the hearing after that.
The Chairman. It all sounds very collegial. I do want to
note for the record that Senator Cardin was here first. Thank
you.
Senator Warner. I will be very brief.
Dr. Sarin, it is great to see you. Thank you, thank you,
thank you for your work. I do want to clarify, and I hope my
Republican staff colleagues will bring this back to the other
members. The question of funding IRS and tax savings was hugely
bipartisan.
In the Infrastructure gang, there was agreement on using
these funds. There was a question and concern that we might
come back and double-dip, but there was broad Republican
agreement--maybe not at quite the $80-billion mark, but at
least at 40, and I think we could have nudged to 60--that we
would have had huge savings.
There was concern that we might come back--and whatever,
Build Back Better morphed into IRA--and reuse it again. So, I
hope, and I will mention with Senator Tillis--there was a huge
understanding on this. And frankly, the CBO estimate of the $80
billion saving $120 billion was at the low end of the
estimates.
There have been some, including Larry Summers and others,
who think that the savings were extraordinarily higher. And I
know Senator Menendez already raised this, and I desperately
hope that what has been quietly agreed to as a bipartisan
initiative does not get slowly chipped away.
I would point out, Mr. Chairman, that if the House
approach, if their threat to have our country default were to
be taken up, and if they were to exclude a half-dozen
entities--now they say they do not want to cut on the domestic
side like veterans and others--I believe they would take back
all $80 billion and, on top of that, would potentially cut IRS
an additional 30 percent.
So the question, when we have members who say, ``I want to
make sure my phone call, my constituent's phone call is
returned in a timely manner,'' we would take an organization
that has already been decimated by cuts and send it right over
the precipice.
I just do not get the fact that--I know there is a
reluctance from some of my Republican friends to ever look at
the revenue side of the house, although all of us who were
involved in debt and deficit issues earlier realized we had to
do revenues. But the easiest place to do revenues is actually
tax enforcement.
Dr. Sarin?
Dr. Sarin. It certainly is, Senator Warner. And I will say
that the lack of ability to collect 2 percent of GDP on an
annualized basis, that's $600 billion that is just sitting
there to help us address our fiscal sustainability concerns.
Senator Warner. And we have had--this tax season came out
relatively well. I wish we would have a little more revenue so
we have a little more time on the attempts for some to have our
Nation default.
But just very briefly, since I said I was not going to take
all my time and give back to Senator Bennet, you know, one of
the things I have raised in this committee with Commissioner
Werfel is to make sure that the Employee Retention Tax Credit--
you know, we are seeing some of that process speed up. We have
had a lot of Virginia businesses file, and I know there are a
lot of Colorado businesses as well.
But if we were to cut back these funds, wouldn't that just
make the problem worse, and are we not--there are a lot of
priorities at the IRS. But isn't the Commissioner starting to
knock those down, and isnt the success rate we have seen
recently a sign, a step in the right direction?
Dr. Sarin. Certainly, and he says that they are going to be
able to double them now that filing season is over. But I will
say, Senator Warner, that the way we got into this situation
with small businesses waiting in limbo with the IRS, was
precisely because we had a decimated agency that could not do
this work, and that is why the IRA is----
Senator Warner. I am going to ask you to cut off, because
Senator Bennet will never be gracious again if I do not stop at
this point.
Thank you, Mr. Chairman.
The Chairman. Well said, Senator Warner.
Senator Bennet?
Senator Bennet. Well said, not about the gracious part but
about the----
Just to follow up on your answer to Senator Warner, Dr.
Sarin, when you say the $600 billion is ``just sitting there,''
what do you mean, it is just sitting there?
Dr. Sarin. What I mean is that today, the difference
between the taxes that are owed based on the tax law that is on
the books, and what the IRS is able to collect is around $600
billion a year. Left unaddressed over the course of the next
decade, that is going to be $7.8 trillion that
disproportionately comes from a tax evasion benefit to the top
1 percent.
Senator Bennet. And that is what I was going to ask you
about. So, if you take--so you are saying that $600 billion
that is owed, it is known that it is owed?
Dr. Sarin. Correct, and that is actually an understatement
of true evasion in the economy, because we know that high-
income individuals and complex partnerships are able to hide
their income even from the audits we use to measure the tax
gap.
Senator Bennet. And so, how is that $600 billion--I mean,
can you talk a little, just a little bit about how that is
calculated in this sense? You know, are you talking about
people who have filed with the IRS and obscured the reality of
their tax liability, or are you talking about people who just
have never filed with the IRS? Add up that $600 billion.
Dr. Sarin. Absolutely. So what I am talking about, where
the IRS has relatively good measurements of evasion, is with
respect to the individual income tax gap, where it does random
audit studies and it looks at the difference between what you
report, or whether or not you file, and what you actually owed.
But what we know is that the top of the distribution is
actually even able to conceal its true income position even
from those audits. We know that between 2014 and 2016, 100 of
the wealthiest nonfilers, people who did the most blatant kind
of evasion, which is not even file their taxes, were
responsible for $10 billion of lost revenue to the fisc.
Senator Bennet. And of the $600 billion, that is--I mean,
that is an annual number?
Dr. Sarin. That is an annual number.
Senator Bennet. So, why is that an annual number? That is
something--so every year, there is the gap that you are talking
about?
Dr. Sarin. Correct. Each and every year we fail to collect
around $600 billion.
Senator Bennet. And what does that mean to the American
people, the tax debt--the other taxpayers who are actually
paying what is owed--if it is $600 billion a year and it is
another $600 billion a year and then another $600 billion a
year?
Dr. Sarin. It creates, and we have not gotten--I am so
grateful for the question, because it is an opportunity to
comment on the fact that you have a system where, for any new
fiscal needs that the government identifies, the only group
that bares the costs of those needs is the group of taxpayers
that are complying with their tax obligations.
So you have a real competitive distortion in the economy,
where certain types of wealthy taxpayers just do not pay what
they owe.
Senator Bennet. I am not a--I do not have my calculator
with me, but I can tell you, Mr. Chairman, you could pay for a
lot of the Child Tax Credit with that $600 billion.
Dr. Sarin. You certainly could, Senator.
Senator Bennet. If you wanted to.
I, with just the remaining time I have left, I want to
thank the chair for holding this meeting, and the reason I want
to thank you is that I have talked to families and small
businesses all over Colorado, and I have heard that they expect
the IRS to work quickly to get Coloradans their returns, which
they do not get them, and they expect to have some decent
customer support.
The IRS, when we passed the Child Tax Credit, when we
passed the Earned Income Tax Credit, the enhancements to those
things, that was a lot of work. But people were able to benefit
from that, and we were able to do it in real time. I think that
is because a lot of us were pushing really hard.
But I think Coloradans and people all over this country
deserve a 21st-century tax administrator, one that answers the
phone when they call, and that allows them to upload documents
electronically, that flags easy to fix errors in their returns.
This sounds like hocus-pocus or magic, but it is the way a
lot of other tax systems in the industrialized world work. It
is not the way our system works, and that is one of the
reasons, frankly, why it is so easy to get away with the kind
of tax fraud that you are talking about, the cheating that you
are talking about.
The people who are not benefiting from that are working
people who are trying to get the benefit of their credit back
from the IRS and cannot do it because they have not been able
to get their phone calls returned, or because the agency is
running software that was written in the 1960s. No offense to
the 1960s, but I think we can do better than that.
So I hope for anything else, Mr. Chairman, out of this,
that you are able to pull some of the politics out of this
issue, that we can put people back to work so they can be
responsive to the people we represent, and we can get on to the
matters that really are of concern to the American people,
which is having a tax code that actually supports working
people and their efforts in an economy where, for 50 years, all
the benefits have accrued to the people at the very top.
So, thanks for having me, and thanks for having this
hearing.
The Chairman. That sums it up. Thank you.
Senator Cortez Masto?
Senator Cortez Masto. Thank you, Mr. Chairman.
Mr. Fort, I am going to direct this first question to you.
The power of the Supreme Court to impact Nevadans' lives every
day is clearer than ever before. The Citizens United decision
in 2010 led to a dark money spending spree, where groups could
influence our elections with billions in new spending from the
shadows, absent any clear guidance or enforcement. Our
elections have become vulnerable to bad actors and foreign
interference without sufficient transparency into who is behind
these campaigns.
Foreign political contributions are illegal under campaign
finance laws. It is extremely difficult to enforce these, since
these groups do not disclose information publicly, or to the
IRS, about their funding sources. The GAO found that the IRS
does not check for illegal foreign money in U.S. elections.
This is why, last Congress, I joined the Spotlight Act with
Senators Tester and Wyden, and the DISCLOSE Act with Senator
Whitehouse, to increase transparency and disclosure of donors
by political special interests and malicious actors. So, Mr.
Fort, I guess my question to you is, how does the lack of
investment harm the IRS's ability for due diligence, to create
better transparency and accountability regarding the influence
of dark money groups?
Mr. Fort. Thanks for the question, Senator. So, my entire
career was with the criminal side of the IRS, so I did not work
on the civil side of the IRS, so I cannot address that part of
the question.
I can tell you from a criminal standpoint, that is a type
of work that the IRS special agents would be involved in with
the Department of Justice and other Federal agencies to address
that from a criminal standpoint. And just as a general comment
from my experience and background, the years of budget cuts and
stagnant budgets mean less application of resources to those
type of critical areas that you mentioned.
Senator Cortez Masto. Well, and that is the point, right?
We are hearing more budget cuts, right? Already the IRS is
underfunded because of all of the cuts. But I hear some of my
Republican colleagues continuing to want to cut even the
additional resources that we put into the IRS just to catch up,
right?
And so, it is going to have a devastating impact on the IRS
and its ability to enforce, whether that is civil or criminal;
is that correct?
Mr. Fort. Yes. I would agree. They are at a breaking point,
and it would be catastrophic at this point.
Senator Cortez Masto. Mr. Sepp, let me ask you this. The
National Taxpayer Advocate's annual report to Congress
highlights the continuing inability for taxpayers with
questions to reach the IRS. While we have seen awesome growth
in responses, the IRS is still playing catch-up when it comes
to implementing technologies to make customer service more
efficient.
Your testimony notes that the IRS must learn to walk before
it runs regarding IT. However, this is simply the IRS playing
catch-up while technology continues to advance. How can the IRS
take a dual approach to improve its cybersecurity while moving
forward with its technological advancements?
Mr. Sepp. Well, the addition of a CIO, Senator, to the IRS
has been helpful. I have to think that there needs to be closer
management of both tracks through something like an IRS
Oversight Board. I also think there has to be a new philosophy
toward compliance in the electronic sphere. The legislation
that you and Senator Blackburn introduced to put parity between
mail and electronic communications with the IRS is very
important.
It is insane that online filers who owe money do not get
the same kind of deference as somebody who throws a check in
the mailbox. They automatically become noncompliant if they do
not have a certain number of hours before filing their payment
on time. That makes absolutely no sense.
So it is a managerial issue as well as funding issue. The
priorities are going to have to be established, especially in
the electronic infrastructure. We talk about putting the cart
before the horse. We have not really even built the barn yet
when it comes to cybersecurity infrastructure. If we are going
to go after cybercriminals for revenues, the IRS needs much
more robust infrastructure to be able to handle that.
Senator Cortez Masto. Thank you; thank you.
Dr. Sarin, in a 2020 article with Larry Summers and Charles
Rossotti, you discuss how unpaid taxes total more than all the
individual income taxes paid by the lowest 90 percent of
earners. You note that the top 1 percent of earners are
responsible for at least 30 percent of the tax gap.
Likewise, in your testimony, you highlighted that if the
United States was able to collect the taxes that were already
on the books, deficits would shrink by nearly half. We are on
the verge of financial catastrophe by defaulting on our debts.
It is a conversation that, unfortunately, the Republican
Speaker refuses to take off the table.
Per your testimony, the Inflation Reduction Act can help
ensure that we reduce the amount of debt that we owe; is that
correct?
Dr. Sarin. That is absolutely correct.
Senator Cortez Masto. So, if we repeal the Inflation
Reduction Act--which again, Speaker McCarthy and some of the
right-wing Republicans in the House want to do--how can we then
actually tackle the tax gap?
Dr. Sarin. You cannot, and what happens is that, in the
context of a conversation about the debt ceiling and the
importance of addressing our deficits, you actually have some
who are arguing for a measure that we know will add to the
deficit and be a tax cut for the wealthy and large corporations
who are evading their fair share.
Senator Cortez Masto. Thank you.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague. We have Senators, I
believe, coming.
I want to ask a question of you, Dr. Sarin, with respect to
gift tax audits. Intentionally failing to file a return is a
crime, but some very affluent individuals still do not file
gift tax returns.
The IRS examined just 95 gift tax returns in 2019. That is
an audit rate of about 0.04 percent, 20 times lower than the
rate at which the IRS audited returns claiming the Earned
Income Tax Credit. Professor Sarin, in your view, what would
repealing IRA funding do to the IRS's ability to police gift
and estate tax compliance by the very affluent?
Dr. Sarin. Thank you so much for the question, Senator.
This came up in, actually, some of my early work on tax
administration. The estate tax rate is something like 40
percent. The effective estate tax is around 13.5 percent. There
are a lot of tricks people play--some are legal, some are
illegal--to avoid their estate and gift tax obligations.
And this should be an area of high focus for the agency
going forward, and it is an area where you are absolutely
right: capacity is totally depleted. Estate tax and gift tax
audit rates are essentially zero today. But a decade ago, they
were only 1 percent.
So, it is not like this is an area where the IRS has
historically had the capacity to invest. Finally, we are giving
them the tools they need and the resources they need and the
stability of multiyear funding to actually be able to invest in
hiring the type of experts who are going to be able to unpack
all of these tricks.
And what that is going to do directly is raise more
revenue, but also what it is going to do indirectly is
encourage less of the gamesmanship and make sure that people,
especially the very wealthiest who are so privileged in this
economy, are able to pay their fair share.
The Chairman. Thank you.
Senator Brown?
Senator Brown. Mr. Chairman, thank you, and I apologize
for--I am having a Banking hearing with the CEOs of Silicon
Valley Bank.
The Chairman. Doing important work.
Senator Brown. Thank you. I will not keep you long. It will
not be the whole 5 minutes.
I recently introduced the FEND Off Fentanyl Act, a
bipartisan bill to help prevent increasingly dangerous forms of
fentanyl from reaching communities in Oregon and Ohio and
elsewhere, by going after it at the source: the transnational
criminal organizations and the money launderers who make the
profits possible. Stemming the flow of fentanyl is a bipartisan
priority. It requires an across-
government effort. The IRS Criminal Investigation unit plays an
important role in that effort.
Mr. Fort, what would happen to IRS efforts to help stop the
flow of fentanyl into our communities if the IRS resources were
cut back?
Mr. Fort. Thank you for the question, Senator. A reduction
or a cut in the funding would mean less cases, exactly the type
of cases you are talking about. They have primary
responsibility over tax crimes, but very broad authority in the
types of cases you talked about: multiagency narcotics
investigations, terrorist financing, things like that. A cut in
the budget would put those cases at serious risk.
Senator Brown. Thank you.
I understand in the case you cited earlier in your
testimony, that the payments largely occurred in
cryptocurrency. Tell us why the IRS is uniquely positioned to
combat crimes happening with cryptocurrency?
Mr. Fort. It is a great question. So what IRS special
agents bring to the table is the ability to follow the money.
Other Federal agencies have other strengths and do amazing
work, but following the money is critical to taking down these
types of criminal organizations.
IRS CI has been at the lead and the forefront in
investigating crimes around cryptocurrency, back from the days
of Silk Road, AlphaBay, BTC-e, Welcome to Video--the list goes
on and on. They really have been leading the charge in those
investigations.
Senator Brown. Thank you, Mr. Fort.
Mr. Chairman, thank you, and thanks to all of you.
The Chairman. Thank you, Senator Brown, for bringing up
fentanyl cases in particular. Oregon has been hit very, very
hard by these fentanyl criminals. You brought up a case. I
asked Mr. Fort about it as well.
These are the real-world consequences of what it means to
basically let these McCarthy budgets slash enforcement funding,
and I thank you for coming in.
You all have been very patient, and I thank you for it.
This has been a very instructive kind of hearing, and if I were
to sum it up--I have heard it mentioned by our witnesses; I
have heard a Senator or two mention it. Guard rails make common
sense, and I can work on those in a bipartisan way.
But make no mistake about it, the first bill that came out
of the House was not about guard rails. It was about tossing
the additional enforcement money into the trash can. What we
have seen is examples today with respect to the real-world kind
of benefits in terms of service and fighting tax cheats.
Mr. Edwards, I really noted your comment about the
strategic operating plan having good things in it. I think
those were exactly your words--and I am going to recognize my
colleague from Washington who has been a very strong advocate
of defending taxpayers and making sure the service is good.
With just my last comment, we can tackle these issues in a
bipartisan way. I wrote two comprehensive tax reform bills, one
with Judd Gregg and one with Senator Coats, who sat over there.
They incorporated a number of the ideas we are talking about
today. In fact, unless my memory fails me, I think, Mr.
Edwards, your organization was very helpful, and what we said
was, we are going to give everybody in America the chance to
get ahead. We are going to be for innovation, we are going to
be for fairness, Democrats and Republicans.
We can tackle these issues in a bipartisan way. I do not
think we are going to be able to tackle them if we just say we
are going to toss all the new enforcement money in the trash
can, and a number of you avoided saying that today. I noted it,
and I noted your comment, Mr. Edwards, with respect to the
benefits of the strategic operating plan.
So, after Senator Cantwell finishes, we will wrap up. But
we are interested in talking to all four of you in the days
ahead. You have a lot of experience in this area, and we get
common ground between people who can have different views.
That is what fixing the tax code is all about, and that is
what I have been all about since the years when I had a full
head of hair and rugged good looks. So, we will look forward to
talking to you.
Senator Cantwell?
Senator Cantwell. Thank you, Mr. Chairman. I know that
there have been many members here asking various questions. I
have definitely been asking lots of questions about the backlog
at the IRS, and communication.
In the Inflation Reduction Act, actually there are a number
of enhancements to customer service, such as improved phone
services, self-account services that allow them to interact
with the IRS, manage payments and funds. So, what does anybody
think the future of this looks like down the road, when we
bring this level of efficiency to the system? I see, Dr. Sarin,
you are nodding, so you must know the most about this or have a
vision about it.
Dr. Sarin. Well, Senator Cantwell, I think it is an
incredibly important question, and I will say a couple of
things in response. One is that the type of backlogs that you
are speaking to, what happened during the pandemic, the fact
that the IRS walked into tax year 2021 with 20 million
unprocessed returns, that will never happen again thanks to the
Inflation Reduction Act.
It will never happen again because you have given the IRS
the tools that it needs to fundamentally digitize its
operations, such that it is not people--currently today, it is
people hand-transcribing line items from paper returns.
The world of the future is here, and it is here--the IRS is
the only organization that functions this way today. We should
be able to instantaneously scan and digitize that information
so that returns are processed instantaneously, and that is what
you have given the IRS the tools to do.
During the pandemic, the IRS answered less than 15 percent
of taxpayer calls. This is because it did not have people to
put on the phones. Thanks to the Inflation Reduction Act, the
IRS does. And you have seen instantaneous changes with respect
to something like an 87-percent level of service.
The IRS of the future is going to be an IRS where, just
like you communicate with your financial institution, you can
deposit checks instantaneously on your phone, you can reach
someone in live time. That is the future that the IRS is going
to be able to build, now that it has these resources.
And the American taxpayers should be incredibly excited
about what it means to be in a country where you have a tax
administrator that is in the 21st century.
Senator Cantwell. What else do we need to do, do you think,
to make sure that that happens and stays consistent to that
vision that you are articulating?
Dr. Sarin. I think there is a real risk, and it has been
unfortunate to observe, over the course of that last several
months, calls for rescinding these funds, because rescinding
these funds puts the IRS back into the Dark Ages.
What also will put the IRS back into the Dark Ages is if,
in the discretionary appropriations process, we don't allow the
IRS to use these IRA funds to do this transformative 21st-
century building-a-new-IRS work, by making them use their
discretionary funds to plug holes in day-to-day operations, if
we do not give them what they need in the discretionary process
to continue to answer those phones and to continue to pay the
workforce that they already have.
Senator Cantwell. Well, I think also in the information--
having worked in software, I mean, one of the things you want
to know right away is, what is the most prevailing problem that
people have, and then you want to be able to communicate about
that.
I would think that that is--you know, in the backlog, in
the questions, you could see where there was a sticking point,
particularly when there were some changes to the code and you
knew that people were going to have a tough time understanding
that.
So it just seems like that would also give the IRS the
ability to look at what is not being communicated or what some
of the problems are and be able to try to address them, or to
say this is where all these cases are left, or this is why we
are having a backlog, or here is who we are having a backlog
with, or it is this segment of the population.
So I am glad that you think that this resource is going to
go where we need to go for the future, because I totally agree.
The IRS has to be a digital IRS for sure, and this is where we
improve service, improve communications, and give people
answers.
So, thank you, Mr. Chairman.
The Chairman. I thank my colleague.
What a fitting kind of ending, to make the technology
initiative that is in front of the IRS the last subject, and I
thank you all.
With respect to the rules of the committee, all members
have to get back to us within 1 week by 5 p.m., and thanks to
all our witnesses for their patience and professionalism. I
thank you.
The Finance Committee is adjourned.
[Whereupon, at 12:15 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Chris Edwards, Kilts Family Chair
in Fiscal Studies, Cato Institute
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you for inviting me to testify at today's hearing, ``House
Republican Supplemental IRS Funding Cuts.''
The Inflation Reduction Act (IRA) included $79 billion of added
funding for the Internal Revenue Service (IRS), which will help to
double the agency's budget in nominal dollars between 2023 and 2031.\1\
House Republicans would rescind most of the new funding in the recent
Limit, Save, Grow Act.
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\1\ Budget of the U.S. Government, Fiscal Year 2024, Analytical
Perspectives (Washington, DC: Government Publishing Office, 2023),
Table 25-1. I am referring to outlays on the budget functions taxpayer
services, business systems modernization, operations support, and
enforcement, not outlays for refundable credits.
The IRS has been the focus of attention because of its poor
taxpayer services and outdated technologies. The agency recently issued
a Strategic Operating Plan (SOP) that promised major improvements.\2\
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\2\ Inflation Reduction Act Strategic Operating Plan, FY 2023-2031
(Washington, DC: Internal Revenue Service, 2023).
unbalanced funding increase
The Inflation Reduction Act (IRA) included $79 billion in mandatory
spending for the IRS over the coming decade, with $45.6 billion for
enforcement, $25.3 billion for operations support, $4.8 billion for
business systems modernization (technology), and $3.2 billion for
taxpayer services.
Figure 1 shows the Biden administration's proposed spending
increases for the four main budget components of the IRS.\3\ The
figures include the IRA funding plus projected discretionary funding.
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\3\ Budget of the U.S. Government, Fiscal Year 2024, Analytical
Perspectives (Washington, DC: Government Publishing Office, 2023),
Table 25-1. In addition to these outlays, the IRS has large outlays for
refundable credits.
Outlays for taxpayer services and business systems are projected to
rise for a few years and then fall, while enforcement outlays will grow
rapidly and more than triple by 2031. Enforcement spending will rise
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from 38 percent of the total this year to 61 percent by 2033.
These funding priorities are off kilter. The Biden budget projects
business systems outlays to be lower in 2033 than today, yet the needs
for new technology will likely remain high. Also, taxpayer services
need major improvements: one recent survey ranked the IRS last among
221 private companies and public agencies on customer service.\4\
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\4\ Survey cited in National Taxpayer Advocate, ``Objectives Report
to Congress, Fiscal Year 2023,'' p. vii.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The SOP says that added taxpayer services and technology
funding will be needed above the IRA amounts.\5\ It discusses
improvements to taxpayer services and business systems over 68 pages of
text, but it discusses enforcement over just 17 pages.\6\ Despite this
emphasis, enforcement received the lion's share of IRA funding.
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\5\ Inflation Reduction Act Strategic Operating Plan, FY 2023-2031
(Washington, DC: Internal Revenue Service, 2023), p. 129.
\6\ Taxpayer services and business systems are discussed in
Objectives 1, 2, and 4, while enforcement is discussed in Objective 3.
Congress should consider rebalancing IRS funding away from
enforcement and toward taxpayer services and business systems.
return on investment
The Congressional Budget Office expects the $79 billion boost to
IRS funding to raise $180 billion over 10 years.\7\ Supporters say this
indicates a high ``return on investment'' from the funding, and thus a
beneficial policy change.\8\ But that only considers the government's
gain. Instead, policymakers should consider the overall costs and
benefits to society.
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\7\ Congressional Budget Office, ``Additional Information About
Increased Enforcement by the Internal Revenue Service,'' August 25,
2022.
\8\ For example, see Committee for a Responsible Federal Budget,
``CBO Estimates $120 Billion from IRS Funding Boost,'' September 2,
2021.
Consider the costs. They include the $79 billion for the IRS and
possibly higher private-sector compliance costs, which may be about 10
percent of the revenues raised.\9\ Costs may also include dead-weight
losses from taxpayers changing their behavior in ways that undermine
output, such as reducing work and investment. Increased enforcement can
also generate hard-to-quantify costs such as taxpayer anguish,
financial uncertainty, and losses of civil liberties.
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\9\ Rosemary Marcuss, et al., ``Income Taxes and Compliance Costs:
How Are They Related,'' National Tax Journal 66, no. 4 (December 2013):
833-854. And see Scott Hodge, ``The Tax Compliance Costs of IRS
Regulations,'' Tax Foundation, August 23, 2022. The estimates do not
include all private-sector costs such as post-filing activities and tax
lobbying.
Now consider the benefits. The government will raise a net $101
billion for added spending, but that will likely displace private-
sector spending. Thus, policymakers need to consider whether the added
spending they envision is worth more than the private spending
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displaced plus the costs of raising the revenue.
Improvements in taxpayer services and business systems could reduce
taxpayer costs, increase IRS accuracy, and boost compliance with the
law. Thus, the more funding going toward these activities, the more
likely there will be a win-win for taxpayers and the government. The
National Taxpayer Advocate argues that ``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.''\10\
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\10\ National Taxpayer Advocate, ``IRS Strategic Operating Plan Has
Potential to Transform Tax Administration,'' NTA Blog, April 6, 2023.
By contrast, more aggressive IRS enforcement would increase
taxpayer costs, as they would invest more time and energy defending
themselves. The IRS would catch some additional tax cheats, but law-
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abiding taxpayers would face collateral damage.
Collateral damage would result because the IRS makes many errors,
which is not surprising given the complexity of the tax code. The
issues at dispute are often gray, as illustrated by litigation
statistics, which show that the IRS wins only about half the time.\11\
For Tax Court and refund cases closed over the past 5 years, the IRS on
decision gained just 48 percent of the dollars in dispute.
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\11\ Internal Revenue Service, Data Book 2022 (Washington, DC:
Internal Revenue Service, 2023), Table 29. I've included Tax Court and
refund cases, 2018 to 2022.
Similarly, IRS auditing imposes collateral damage because many
audited taxpayers have paid the correct amount. For example, between 40
to 50 percent of partnership audits result in no recommended
changes.\12\ For individuals earning more than $5 million, the audit
no-change rate is just under 40 percent.\13\ Given that audits are
often targeted by IRS algorithms and discrepancies, these percentages
seem quite high. Recommended changes can be wrong and may be appealed.
Tax litigation expert Daniel Pilla believes that more than half of IRS
audit results are incorrect.\14\
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\12\ Internal Revenue Service, Data Book 2022 (Washington, DC:
Internal Revenue Service, 2023), Table 17. The no-change rate is 40 to
50 percent based on closed audits for 2012 to 2017.
\13\ Government Accountability Office, ``Tax Compliance: Trends of
IRS Audit Rates and Results for Individual Taxpayers by Income,'' GAO-
22-104960, May 2022, Figure 4. The GAO no-change estimates are higher
than figures in the IRS Data Book for reasons the GAO discusses.
\14\ Daniel Pilla argues, ``IRS's audit results are incorrect
between 60 and 90 percent of the time,'' which he says stems from
relatively few taxpayers challenging them. Daniel Pilla, ``Three False
Narratives Being Used in the IRS Funding Push,'' National Review, May
17, 2021.
The IRS and the Biden administration promise to focus increased
enforcement on high-earning households. Interestingly, IRS data show
that tax recommended on audits is higher relative to income for middle-
income returns than for high-income returns. For audits with
recommended changes, the changes average roughly 5 to 8 percent of
income for middle-income taxpayers but just 1 to 3 percent of income
for high earners.\15\ High-earning taxpayers are more likely to receive
expert tax advice, and thus less likely to make errors.
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\15\ Government Accountability Office, ``Tax Compliance: Trends of
IRS Audit Rates and Results for Individual Taxpayers by Income,'' GAO-
22-104960, May 2022. Author calculations based on Tables 1 and 4. I
roughly estimated income within each group to calculate the ratios. You
can see the same pattern in the IRS Data Book Table 17.
Of course, the IRS needs to enforce the tax laws, as enforcement
deters cheating. But there are downsides to increased enforcement,
including higher compliance costs, higher dead-weight losses, and added
stress and uncertainty for families and businesses. With more
aggressive enforcement, taxpayers who are already paying the correct
amount will need to expend time and energy defending themselves. And
because the IRS is such a powerful agency, aggressive tax enforcement
can put civil liberties at risk.\16\
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\16\ Civil liberties issues are summarized in Joseph Bishop-
Henchman, ``Transforming the Internal Revenue Service,'' Cato
Institute, April 11, 2023.
federal tax gap stable
Last year, the IRS released a new estimate of the ``tax gap,''
which is the amount of Federal taxes owed but not paid.\17\ The average
gross tax gap for 2014-2016 was $496 billion, and after late payments
and enforcement the net gap was $428 billion. The report includes tax
gap estimates for prior years and a projection for 2017-2019.
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\17\ Federal Tax Compliance Research: Tax Gap Estimates for Tax
Years 2014-2016 (Washington, DC: Internal Revenue Service, August
2022).
The dollar value of the tax gap has increased over time, but the
gap has not increased when compared to the Nation's gross domestic
product (GDP), as shown in Figure 2.\18\ Despite the decline in audit
rates, the tax gap dipped from 3.3 percent of GDP 2 decades ago to 2.6
percent more recently. The degree to which Americans are law-abiding on
Federal taxes does not appear to have changed much over time.
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\18\ I used the GDP of the middle year for the multiyear estimates.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
u.s. and foreign tax gaps
International studies show that the U.S. tax gap is not high
compared to other advanced economies. Our Federal tax gap is 2.6
percent of GDP, and if we assume the same nonpayment rate for State-
local taxes, the overall U.S. tax gap is about 4.0 percent of GDP.\19\
That figure may be compared to other countries.
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\19\ I estimated State-local tax gaps based on the ratio of total
State-local to Federal tax revenues of 0.52 to 1.0 over the past 3
years.
In a 2018 study, Konrad Raczkowski and Bogdan Mroz estimated
that the tax gap for the United States was 3.8 percent of GDP
and the gap for 28 European Union (EU) countries was 7.7
percent of GDP.\20\
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\20\ Konrad Raczkowski and Bogdan Mroz, ``Tax Gap in the Global
Economy,'' Journal of Money Laundering Control 21, no. 4 (December
2018): 545-554.
In a 2015 study, Konrad Raczkowski estimated that the tax
gap for 28 EU countries was 10.7 percent of GDP.\21\
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\21\ Konrad Raczkowski, ``Measuring the Tax Gap in the European
Economy,'' Journal of Economics and Management 21, no. 3 (October
2015): 58-72.
In a 2019 study, Richard Murphy estimated that the tax gap
for 28 EU countries was 5.6 percent of GDP.\22\
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\22\ Richard Murphy, ``The European Tax Gap: A Report for the
Socialists and Democrats Group in the European Parliament,'' Tax
Research UK, January 23, 2019.
However, the overall EU tax burden is higher than the U.S. burden.
If we adjust the EU gap estimates down using the ratio of U.S. to EU
taxes, the EU gap estimates are 5.1 percent for Raczkowski-Mroz, 7.1
percent for Raczkowski, and 3.7 percent for Murphy.\23\ These figures
are still similar or higher than the U.S. gap. However, there are a few
advanced economies that have published detailed gap estimates that are
lower than the U.S. gap.\24\
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\23\ The ratio of U.S. taxes-to-GDP to EU taxes-to-GDP is about
0.66.
\24\ For example, see Canada Revenue Agency, ``Overall Federal Tax
Gap Report,'' 2021. And see HM Revenue and Customs, ``Measuring tax
gaps 2022 edition: Tax gap estimates for 2020 to 2021,'' June 23, 2022.
The above bulleted studies are based on measures of shadow
economies, which generally means otherwise legal activities that escape
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taxation. Here are two further studies:
In a 2018 study across 158 countries, Leandro Medina and
Friedrich Schneider found that the U.S. shadow economy is the
second smallest as a percent of GDP.\25\ From 2010 to 2015, the
U.S. shadow economy of 7.7 percent compared to the European
average of 20.2 percent.
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\25\ Leandro Medina and Friedrich Schneider, ``Shadow Economies
Around the World: What Did We Learn Over the Last 20 Years?'', IMF
Working Paper, January 2018.
In a 2016 study across 157 countries, Mai Hassan and
Friedrich Schneider estimated that the U.S. shadow economy was
8.3 percent of GDP in 2013 and the EU's was 23.1 percent.\26\
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\26\ Mai Hassan and Friedrich Schneider, ``Size and Development of
the Shadow Economies of 157 Countries Worldwide: Updated and New
Measures from 1999 to 2013,'' Institute for the Study of Labor (IZA,
Germany), October 2016. I calculated the average of 28 EU nations from
their appendix.
These sorts of estimates should be considered rough. Also, they
overstate revenues that might be gained from enforcement if they do not
account for behavioral responses.\27\ For example, if the IRS were to
squeeze more money from businesses, some would cut hiring and
investment, which would reduce the revenues raised.
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\27\ Norman Gemmell and John Hasseldine, ``The Tax Gap: A
Methodological Review,'' Advances in Taxation 20 (December 2012): 203-
231.
better ways to boost tax compliance
The IRA boosted enforcement spending to improve compliance, but
there are three better ways to boost compliance that would benefit
taxpayers and the economy.
First, keeping taxes low to reduce incentives for cheating.
Discussing international studies, Hassan and Schneider note, ``It is
widely accepted in the literature that the most important cause leading
to the proliferation of the shadow economy is the tax burden. The
higher the overall tax burden, the stronger are the incentives to
operate informally in The higher the overall tax burden, the stronger
are the incentives to operate informally in order to avoid paying the
taxes.''\28\
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\28\ Mai Hassan and Friedrich Schneider, ``Size and Development of
the Shadow Economies of 157 Countries Worldwide: Updated and New
Measures from 1999 to 2013,'' Institute for the Study of Labor (IZA,
Germany), October 2016.
Second, improving taxpayer services, technologies, and employee
training at the IRS, which would reduce filing and audit errors. The
National Taxpayer Advocate said, ``Tax compliance depends on prompt,
high-quality customer service, and when compliance becomes unduly
burdensome, the IRS runs the risk that taxpayers will simply quit
trying.''\29\
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\29\ National Taxpayer Advocate, ``Hello, Is Anyone There?
Taxpayers and Practitioners Continue to Experience Frustration Over
Lack of Adequate Phone Service,'' NTA Blog, February 8, 2023.
Third, simplifying the tax code. Rising complexity is an invitation
for errors and abuse. In a 2022 report on IRS audits, the Government
Accountability Office found, ``Since fiscal year 2010, average audit
hours have more than doubled for returns with income of $200,000 and
above.''\30\ That statistic likely reflects the rising complexity of
the code.
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\30\ Government Accountability Office, ``Tax Compliance: Trends of
IRS Audit Rates and Results for Individual Taxpayers by Income,'' GAO-
22-104960, May 2022, p. 14.
In 2012, the National Taxpayer Advocate said that tax code
complexity ``facilitates tax avoidance by enabling sophisticated
taxpayers to reduce their tax liabilities and by providing criminals
with opportunities to commit tax fraud.''\31\ She concluded that tax
reforms to simplify the code would ``reduce the likelihood that
sophisticated taxpayers can exploit arcane provisions to avoid paying
their fair share of tax; enable taxpayers to understand how their tax
liabilities are computed and prepare their own returns; improve
taxpayer morale and tax compliance.''\32\
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\31\ Taxpayer Advocate Service, ``2012 Annual Report to Congress:
Volume 1,'' December 31, 2012, p. 3.
\32\ Taxpayer Advocate Service, ``2012 Annual Report to Congress:
Volume 1,'' December 31, 2012, p. 22.
Unfortunately, Congress has not heeded the NTA's advice. The IRA,
for example, added 20 or so new and expanded energy tax breaks, many
with complicated rules. The SOP says the energy provisions will cost
$3.9 billion to administer, and they will surely generate enforcement
problems. The new breaks will also boost costs for planning,
compliance, and lobbying in the private sector since $1 trillion in
benefits are at stake.\33\
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\33\ Penn-Wharton Budget Model, ``Update: Budgetary Cost of Climate
and Energy Provisions in the Inflation Reduction Act,'' April 27, 2023.
The number of official tax expenditures has risen from 53 in 1970
to 205 today, making the IRS's administration and enforcement job ever
more difficult.\34\ We know from experience that complex tax
expenditures, such as the Low-Income Housing Tax Credit, generate
substantial errors and abuse.\35\ So tax simplification to eliminate
special breaks would reduce the tax gap and reduce IRS costs for
administration and enforcement.
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\34\ Author counts based on Joint Committee on Taxation,
``Estimates of Federal Tax Expenditures,'' JCX-22-22, December 22,
2022, and Joint Committee on Taxation, ``Estimates of Federal Tax
Expenditures,'' JCS-28-72, October 4, 1972.
\35\ Chris Edwards and Vanessa Brown Calder, ``Low-Income Housing
Tax Credit: Costly, Complex, and Corruption-Prone,'' Cato Institute,
November 13, 2017.
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conclusions
IRS estimates show that the tax gap is not rising relative to the
size of the economy, and the U.S. tax gap appears to be modest by
international standards. Nonetheless, policymakers can reduce the tax
gap by reducing tax rates, improving IRS services and efficiencies, and
simplifying the tax code. Those policies would be a win for taxpayers,
the government, and the economy.
The National Taxpayer Advocate recently argued that IRA funding
``is disproportionately allocated for enforcement activities, and I
believe Congress should reallocate IRS funding to achieve a better
balance with taxpayer service needs and IT modernization.''\36\ That
seems right, and so a compromise between House and Senate may be to
shift some of the enforcement increases to taxpayer services and
business systems.
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\36\ National Taxpayer Advocate, ``IRS Strategic Operating Plan Has
Potential to Transform Tax Administration,'' NTA Blog, April 6, 2023.
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Thank you for holding this important hearing.
______
Prepared Statement of John D. Fort, Director of Investigations, Kostela-
netz, LLP; and Former Chief, Criminal Investigation, Internal Revenue
Service
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you for the opportunity to discuss the need for consistent
funding for the Internal Revenue Service (IRS) to address both critical
service updates for the taxpayer experience and sufficient support for
enforcement activities. As the former Chief of Criminal Investigation
(CI) for the IRS, I have witnessed firsthand the important role that
enforcement plays in promoting voluntary compliance with the Nation's
tax laws. But enforcement does not operate in a vacuum within the IRS
and the appropriate mix in funding enforcement, technology, and
taxpayer service initiatives is the key to building an IRS that is both
responsive and efficient.
The IRS is the backbone of the Nation's tax system- it ensures the
collection of taxes that fund our essential government programs and
services. It is responsible for managing a budget of more than $11
billion, which goes toward processing tax returns, enforcing
compliance, and providing essential services to taxpayers. Underfunding
the agency means putting the accuracy and efficacy of our tax system at
risk.
We have all heard the stories of the IRS using 60-year-old
technology. While I know improvements in many areas have been made
where possible, it is impossible to modernize an antiquated system and
develop a range of new technologies to improve tax administration while
executing filing seasons with a budget that does not allow for such
improvements. The IRS needs advanced communication channels that allow
taxpayers to reach the IRS quickly and efficiently through varies
means. Upgrades are necessary to automate many of its procedures and
increase the speed of their tax processing procedures. Taxpayers should
be able to interact with the IRS in many of the same ways that they
interact with their financial institutions. Such automated and digital
upgrading cannot happen without constant and regular funding of the
IRS.
During my almost 30 years with the IRS, it was embarrassing to me
as an employee that my elderly parents, in-laws, relatives, friends,
and neighbors couldn't pick up the phone and call the IRS with a
question, or better yet, manage their account online. It was not for a
lack of effort by the IRS, but the years of budget cuts caused the
service to make impossible choices to keep the lights on in certain
areas. It appears that we are heading in that direction, albeit 30
years later than needed with the passage of the Inflation Reduction Act
(IRA). As the organization responsible for collecting 98 percent of the
revenue for this country, trusting the public to figure out exactly
what their tax obligation is seems contrary to me. It also seems
contrary to me to starve the agency for so many years rather than try
to facilitate these interactions with the public.
Another critical concern is the implementation of recent tax law
changes. Some of these changes impose new regulatory and reporting
requirements on taxpayers, including many exclusively for the ultra-
wealthy; however, the real problem is the lack of expertise in the IRS
staff relevant to new tax provisions. Acquiring and processing all this
information will necessitate a massive amount of time and resources.
Positioning a well-trained, diverse staff equipped with the latest
modern technological changes is crucial to address these tax law
changes. The IRS does not have the staff to accomplish this goal and
they do not have the capacity to hire staff quickly enough to make
changes from year to year. Nothing short of a complete overhaul to the
way the IRS hires and trains their employees will make the changes
needed to implement these important upgrades. But like any large
organization, these changes have impacts on the entire organization. If
the civil side of the IRS is going to ramp up the hiring of staff to be
able to work more complex civil audits and produce more complex
programs to aide in the efficiency of filing tax returns, similar
investments will need to be made on the criminal side. CI will only be
able to handle complex referrals to work complex cases if the
investments in enforcement are on both sides. Currently, CI reports
that only 6 percent of their inventory comes from civil referrals. This
is a missed opportunity and the result of a lack of investment in all
areas of enforcement for many years. It is important to remember that
in a properly functioning tax administration system, the civil and
criminal functions work closely together to align their goals and
program areas.
When most of the public thinks of the IRS, they think of filing
their taxes and potentially getting audited. Taxpayer service and civil
enforcement cannot exist on their own without similar, consistent
funding for both areas. This funding is essential to ensure that
taxpayers can receive the assistance they need from the agency to file
their returns and resolve their disputes while knowing that audits
conducted by the agency are fair and efficient. The decades of funding
battles for the IRS have left the service in a place where achieving
this result for the American public is not possible without a
significant infusion of money over and above what the annual budget
provides to the IRS.
It will take far more, however, than a dramatic one-time infusion
of money to cure what ails the Nation's revenue arm. Between 2010 and
2019, according to the IRS Data Book, the agency's budget dropped from
$14.6 billion to $11.5 billion, and its workforce dropped from
approximately 94,000 employees to 73,000--all while the economy roared
on and generated enormous wealth. Starving the IRS of funding was
shortsighted, hurting the entire country.
The voluntary compliance rate is estimated to be roughly 84
percent, and every 1 percentage point in this level of compliance costs
the U.S. approximately $40 billion dollars. When individuals or
corporations skirt their tax obligations, they do so on the backs of
their fellow Americans: They pay less, while the rest of us pay more.
One of the areas that the IRA purports to help the service
accelerate is their use of data analytics. With so many analytic tools
available to comb through the endless amounts of data, not taking
advantage of them would be foolish. There is likely no other agency in
the world with as much rich data as the IRS, so the need to manage that
data in a useful way could be the single most important thing the IRS
needs to focus on.
Data analytics is a very broad and often overused term. In the
context of tax administration, it has the potential to be the ``secret
sauce'' that allows the IRS to maximize the deployment of their human
resources. In my opinion, the investment in data analytics needs to
bring the analytics as close to the filing of the tax return as
possible. If errors and anomalies are detected or mismatches occur when
the return is filed--not just in identity theft--then the potential
exists for these issues to be resolved without the IRS having to invest
costly human resources to conduct an audit or investigation.
The investment in data analytics pays dividends on the criminal
side as well. While the Nationally Coordinated Investigations Unit
(NCIU) began using complex models to build case leads several years ago
while I was Chief, that model could supersize case development with the
right investment from IRA money. This could reduce the amount of cases
that are closed without action, increase the complexity of cases that
are selected, and ultimately increase tax compliance by showing the
public that illegal tax and other financial crimes are not a profitable
business and that there are serious repercussions for non-compliance.
As mentioned, I spent my career with the Criminal Investigation
Division within the IRS--the only agency with the authority to
investigate and recommend prosecution for violations of the tax code.
CI forms the backbone of the voluntary compliance regime that our tax
system depends on. Let me say that again--CI is the only agency in our
government allowed to investigate and recommend prosecution of Federal
tax crimes. The fact that you can be incarcerated for committing felony
tax crimes in the United States provides a strong deterrent to those
looking to take an unfair advantage over their neighbors and business
competitors. Without sustained funding for rigorous enforcement, the
system of voluntary compliance will continue to erode.
While what follows is a glowing report of the successes of CI, what
this testimony does not include is all of the criminals CI did not
investigate due to a lack of resources over the years. Commonly
referred to as the ``best financial investigators in the world,'' CI
does not have the investigative capacity to work all the investigations
that demand attention by the IRS and DOJ. CI could spend 100 percent of
their time on any one program area and still not root out all crime in
that program area. Trying to pick the most impactful cases that will
create deterrence in each program area in each neighborhood in America
has been the formula for success for many years. And while CI has
achieved incredible results with a diminishing budget for years now,
the amount of money left on the table by not investigating various
egregious crimes where resources were not available is unfortunate and
not fair to those of us that pay our fair share. IRA money is expected
to close this gap for CI just as it will in other areas for the rest of
the service.
CI's services are in high demand by both the Department of Justice
(DOJ) and by U.S. Attorney Offices around the country. There simply are
not enough resources to work the priorities of the DOJ and the IRS
alike. If you took a survey of the U.S. Attorney's Offices, you would
quickly learn the immeasurable value that the men and women of IRS-CI
bring to all their investigations. Prosecutors want the best financial
investigators on all their cases and sometimes compromises must be made
to ensure CI works those cases that have the biggest impact on the most
people. Why should we have to compromise on significant tax and
financial crime cases? Why should the world and our financial systems
be less safe because we are not investing in the right places? This
seems like an unnecessary choice to me.
When difficult choices are made involving case selection and
strong, righteous cases are not worked due to resource issues, the
loser is the American public. Every major law enforcement agency brings
their strengths to the table--CI's strengths are investigating
financial crimes, often complex financial crimes. IRS-CI devotes 100
percent of their resources to investigating financial crimes. Virtually
every alleged Federal crime involves greed, and where there is greed
there is money. Following the money is what CI does best, and that is
backed up with a 92-percent conviction rate, believed to be one of the
highest in Federal law enforcement. Like the rest of the IRS, CI
understands the important role of oversight. They welcome that
oversight as no one should expect a blank check without showing a
return on the investment from the American taxpayer. This produces
trust in the agency and is vital in today's world.
In a system where resources are not without end, deterrence must
play a significant role in enforcement. IRS-CI endeavors to maximize
publicity of CI prosecutions to provide a strong deterrent message to
would-be tax evaders and those who commit other financial crimes. This
helps ensure integrity and fairness in the tax system. This is a
fundamental premise to all prosecuted Federal financial crimes. There
are not enough resources to investigate the way out of the problem, so
publicity and deterrence plays a key role. The IRS's relevance with
regards to tax enforcement relies heavily on the ability of CI to
investigate and recommend prosecution of criminal tax violations to
DOJ. While tax violations are the bread and butter of the agency, CI
investigates and plays a critical role in much more than just tax
violations. When Congress authorized Bank Secrecy Act and Money
Laundering jurisdictions for the agency more than 50 years ago, it was
because Congress recognized the importance of addressing these crimes
required the skills and expertise of IRS-CI to help ``follow the
money.'' For the last 50 years, there has been no agency better at
following the money than IRS-CI and the role of IRS-CI has assisted in
taking many dangerous organizations off the streets and has made
Americans safer and our financial systems safer and more secure.
Dr. Jeffrey A. Dubin is cofounder and partner in Pacific Economics
Group and a tenured professor of economics at the California Institute
of Technology. He has spent his career analyzing microeconomic modeling
with an emphasis on discrete-choice econometrics. His research includes
the effect of enforcement and publicity on the deterrence of future
crimes. In 2007, his research found that ``CI activities have a
measurable and significant effect on voluntary compliance. Second, it
concludes that the mix of sentenced cases (for tax and money laundering
violations) is not a significant determinant of tax compliance. Third,
it finds that incarceration and probation (rather than fines) have the
most influence on taxpayers. . . . Doubling CI tax and money laundering
sentences is forecast to increase assessed collections by $16.0
billion. It estimates the general deterrence or spillover effects from
either audit or CI activities to be approximately 95 percent.''
program areas
What follows is a small example of the types of cases in which CI
has led or has been significantly involved in over the last few years.
These cases show the breadth and skill of CI's Special Agents in
various types of fraud and criminal activity that have had significant
impacts on the financial system at home and overseas. Despite being
underfunded for many years, CI has consistently outperformed
expectations. Increased funding to CI would obviously mean an increase
in impactful cases/
investigations. This increase in CI's pipeline would mean more
criminals are held accountable, more deterrence to committing these
crimes is created, and the domestic and global financial system is
protected from the flow of illicit funds.
It should also be noted that most of these cases were worked in a
multiagency environment, with DOJ, one or more Federal agencies and
often with one or more private industry partners. The use of multi-
agency investigations is a force multiplier in complex Federal
investigations. Reduced funding for IRS-CI means reduced effectiveness
for Federal multiagency investigations. Taking away one critical
Federal agency, such as IRS-CI is akin to losing a link in a chain.
This means fewer or less effective investigations of narcotic
traffickers, child exploiters, terrorist financing organizations, Ponzi
schemes, sanctions investigations and all other investigations that
utilize this proven recipe for success.
Tax Investigations
IRS-CI is the only Federal law enforcement agency authorized to
investigate title 26 (Federal criminal tax) violations. Priority areas
include abusive tax schemes, employment tax fraud, non-filers,
questionable refund program, international tax enforcement, abusive
return preparers, identity theft and many others. Crossover between tax
and non-tax crimes is common and the effective utilization of
multiagency investigations is utilized in many Federal tax
investigations.
Wealthy taxpayers have historically been able to shield themselves
from the scrutiny of the tax authorities through complicated, but legal
tax strategies. So, it stands to reason that to tackle this disparity
in compliance rates, the IRS should consider a more equitable
allocation of enforcement resources by addressing tax scams and other
illegal activities that benefit the rich without targeting low- and
middle-income earners. IRA funding should bridge this gap and allow CI
to use data analytics, increased staffing, and better coordination with
civil partners to find the most egregious tax cases to work.
Case examples include:
Kingston Investigation--3/16/2020
https://www.irs.gov/compliance/criminal-investigation/jury-finds-
los-angeles-businessman-guilty-in-1-billion-biodiesel-tax-fraud-scheme
Washakie Renewable Energy (WRE) was a company owned by Jacob
and Isaiah Kingston and located in Utah. WRE made false claims
for fuel excise tax credits exceeding $1.1 billion.
Lev Dermen sentenced to 40 years and Jacob Kingston
sentenced to 18 years among others.
Brockman Investigation--10/15/2020
https://www.justice.gov/opa/pr/ceo-multibillion-dollar-software-
company-indicted-decades-long-tax-evasion-and-wire-fraud
Robert Brockman, the CEO of an Ohio-based software company,
was indicted with tax evasion, wire fraud, money laundering,
and other offenses. The charges stem from a decades-long scheme
to conceal approximately $2 billion in income from the IRS as
well as a scheme to defraud investors in the software company's
debt securities.
Brockman passed away before he could face trial.
Antonieta Mena--6/24/21 (10 years); Melanie Wilhelm--8/13/2021 (27
months)
https://www.justice.gov/usao-sdfl/pr/owner-immigration-business-
pleads-guilty-defrauding-uscis-and-irs
Subjects conspired to steal approximately $1.8 million from
the Treasury by directing fraudulently obtained tax refund
checks through an attorney client/trust accounts.
Refund checks were issued based on false tax returns using
stolen identities from target immigration business and proceeds
were used to purchase about a dozen investment properties and
support subject's lifestyle.
Singapore Solution--9/28/2021
https://www.justice.gov/opa/pr/indictment-unsealed-against-six-
individuals-and-foreign-financial-service-firm-tax-evasion
Six people offshore financial service executives and a Swiss
financial services company were charged with conspiracy to
defraud the IRS by helping three large-value U.S. taxpayer
clients conceal more than $60 million in income and assets held
in undeclared, offshore bank accounts and to evade U.S. income
taxes.
Credit Suisse--5/2014
https://www.justice.gov/opa/pr/credit-suisse-pleads-guilty-
conspiracy-aid-and-assist-us-taxpayers-filing-false-returns
Bank admitted to helping U.S. taxpayers hide offshore
accounts from IRS and agreed to pay $2.6 billion, the highest
ever payment in a criminal tax case investigation; also led to
indictment of eight Credit Suisse employees since 2011.
The plea agreement, along with agreements made with State
and Federal partners, provided that Credit Suisse would pay a
total of $2.6 billion--$1.8 billion to the Department of
Justice for the U.S. Treasury, $100 million to the Federal
Reserve, and $715 million to the New York State Department of
Financial Services.
Narcotics/Counterterrorism/National Security Investigations
IRS-CI targets the illicit financial flows of Transnational
Criminal Organizations to reduce the economic incentive of narcotics
trafficking, terrorist financing, and money laundering. IRS-CI has key
positions and is an equal partner with sister Federal agencies to
enhance operational coordination with a variety of agencies to include
the Drug Enforcement Agency (DEA), the Organized Crime Drug Enforcement
Task Force (OCDETF) Fusion Center, FinCEN, the High Intensity Drug
Trafficking Areas (HIDTA), Joint Terrorism Task Force (JTTF), and
National Counterintelligence Task Force (NCITF) to name a few.
Investigations involve money laundering (title 18) and currency
violations (title 31). IRS-CI is the largest user of Bank Secrecy Act
data to identify significant financial criminal activity. IRS-CI
recently released data showing that over the past 3 fiscal years, more
than 83 percent of IRS-CI criminal investigations recommended for
prosecution had a primary subject with a related BSA filing.
Convictions in those cases resulted in average prison sentences of 38
months, $7.7 billion in asset seizures, $256 million in restitution,
and $225 million in asset forfeitures. Approximately 15.8 percent of
all IRS-CI investigations opened during FY 2022 originated from a BSA
form. Investigative areas from this data include money laundering,
narcotics, public corruption, corporate fraud, terrorism, health-care
fraud, and financial institution fraud.
Case examples include:
Operation SpecTor--5/2/23
https://www.justice.gov/opa/pr/largest-international-operation-
against-darknet-trafficking-fentanyl-and-opioids-results
Operation SpecTor was a coordinated international effort
that spanned three continents to disrupt dark web fentanyl and
opioid trafficking. Operation SpecTor is a Joint Criminal
Opioid and Darknet Enforcement (JCODE) operation targeting
darknet trafficking of fentanyl and opioids.
The operation resulted in 288 arrests--the most ever for any
JCODE operation and nearly double that of the prior operation.
Law enforcement conducted more seizures than any prior JCODE
operation, which included 117 firearms, 850 kilograms of drugs,
including 64 kilograms of fentanyl or fentanyl-laced narcotics
and $53.4 million in cash and virtual currency.
El Chapo--2/12/19
https://www.justice.gov/opa/pr/joaquin-el-chapo-guzman-sinaloa-
cartel-leader-convicted-running-continuing-criminal
Joaquin Archivaldo Guzman Loera, known by various aliases,
including ``El Chapo'' and ``El Rapido,'' was convicted of
being a principal operator of a continuing criminal
enterprise--the Mexican organized crime syndicate known as the
Sinaloa Cartel--a charge that includes 26 drug-related
violations and one murder conspiracy.
Guzman Loera was convicted of all 10 counts of a superseding
indictment, including narcotics trafficking, using a firearm in
furtherance of his drug crimes and participating in a money
laundering conspiracy.
El Chapitos--4/14/23
https://www.irs.gov/compliance/criminal-investigation/four-of-
chapos-sons-indicted-for-large-scale-drug-trafficking-money-laundering-
and-violent-crimes-as-alleged-leaders-of-sinaloa-cartel
El Chapitos, El Chapo's four children, who led the Sinaloa
cartel along with Mayo and Damaso Lopez Nunez, coordinated the
cartel's drug trafficking activities with other members and
associates of the cartel to import large quantities cocaine
from Central/South American countries into Mexico and then
further distribute the cocaine as well as heroin,
methamphetamine, and marijuana into the United States,
including the Chicago area, and other areas abroad.
Vasquez-Hernandez--11/24/14
https://www.justice.gov/usao-ndil/pr/sinaloa-cartel-member-
sentenced-22-years-federal-prison-plea-agreements-unsealed
Alfredo Vasquez-Hernandez, 59, was sentenced to 22 years in
prison for his role in a $1-billion trafficking conspiracy.
Vasquez-Hernandez was a high-ranking member of the Sinaloa
cartel and a close lieutenant of Joaquin ``El Chapo'' Guzman.
Hernandez was the logistics man behind shipping tons of
drugs by train from Mexico to Chicago concealed amid furniture
cargo.
Aguirre--12/03/21
https://www.irs.gov/compliance/criminal-investigation/sinaloa-
cartel-leader-convicted
Herman Aguirre, the leader of transnational drug conspiracy
tied to the El Chapo Mexican drug cartel, was convicted of
narcotics conspiracy, and operating a continuing criminal
enterprise and money laundering conspiracy. He was sentenced to
serve life in prison.
Aguirre was the leader of a transnational drug trafficking
organization that utilized contacts and a source of supply
whose territory included Mexico, Arizona, California, and
elsewhere. The source of supply was the Sinaloa Cartel, led by
Joaquin ``El Chapo'' Guzman and Ismael ``El Mayo'' Zambada.
kleptocracy
Current investigations involving Russian oligarchs, corrupt
politicians, and those who facilitate the illicit movement of money on
behalf of sanctioned individuals or organizations are a priority for
all law enforcement and CI is an active participant in the
Kleptocapture Taskforce by DOJ and joined the task force at its
inception. IRS-CI investigators are not only experts in tracing assets
and understanding the complex global financial world, but they also
work seamlessly with law enforcement partners across the globe to
ensure the integrity of the U.S. financial system on behalf of U.S.
taxpayers. Just last week, IRS-CI made news by training three Ukrainian
law enforcement agencies with the help of private-sector partners in
crypto and cyber tools. IRS-CI's asset seizure and forfeiture program
utilizes seizure and forfeiture authority as an investigative tool to
disrupt and dismantle criminal enterprises. The program seeks to
deprive criminals of property used in or acquired through illegal
activities.
IRS-CI has active investigations involving Russian oligarchs,
corrupt politicians, and those who facilitate the illicit movement of
money on behalf of sanctioned individuals or organizations. When a
foreign corrupt government official receives bribes, they will many
times use a third party to move, or launder, those illegal proceeds to
buy properties, cryptocurrencies, and many other assets. If any of
those move into or through the United States financial systems, IRS-CI
investigators can trace the money trail. IRS-CI targets the third-party
money launderers because it allows investigators to identify a stream
of illegal funds from multiple corrupt officials. Once assets are
identified, IRS-CI will move to seize and forfeit the assets. IRS-CI's
role in protecting the integrity of sanctions issued by the US
Government is a critical component to the overall U.S. response to the
Russian invasion of Ukraine and other global conflicts.
Case examples include:
Zong Money Laundering/IEEPA Case--12/7/2018
https://www.justice.gov/usao-ak/pr/former-anchorage-resident-
sentenced-federal-prison-international-money-laundering
In December 2018, in Anchorage, AK, Mitchell Zong was
sentenced to 30 months in prison for conspiracy to commit money
laundering with his father, Kenneth Zong. Mitchell Zong
laundered approximately $980,000 of Iranian derived funds
knowing the funds came from his father's illegal transactions
with Iranian nationals.
Kenneth Zong had been under indictment in the District of
Alaska for 47 violations of International Emergency Economic
Powers Act (IEEPA), Providing Unlawful Services to the
Government of Iran, Conspiracy to Commit Money Laundering, and
Money Laundering.
UniCredit Bank IEEPA Case--4/15/2019
https://www.justice.gov/opa/pr/unicredit-bank-ag-agrees-plead-
guilty-illegally-processing-transactions-violation-iranian
In 2019, UniCredit Bank AG (UCB AG), a financial institution
headquartered in Munich, operating under the name
HypoVereinsbank and part of the UniCredit Group agreed to plead
guilty to conspiring to violate IEEPA and to defraud the United
States by processing hundreds of millions of dollars of
transactions through the U.S. financial system on behalf of an
entity designated as a weapons of mass destruction proliferator
and other Iranian entities subject to U.S. economic sanctions.
UniCredit Bank Austria (BA), another financial institution
in the UniCredit Group, headquartered in Vienna, Austria,
agreed to forfeit $20 million and entered into a non-
prosecution agreement to resolve an investigation into its
violations of IEEPA. UniCredit SpA, the parent of both UCB AG
and BA, agreed to ensure that UCB AG and BA's obligations are
fulfilled.
Cyber/Cryptocurrency Investigations
Since 2014, IRS-CI's Cyber Crimes has proportionately grown in both
resources and results. Beginning with one Cyber Crimes Unit in the
Washington, DC area consisting of eight agents and a few contractors,
CI was able to successfully prosecute some of the first known criminal
actors in this space (e.g., Liberty Reserve, Silk Road, and BTC-e).
IRS-CI has led the charge in dismantling these dangerous financial
criminal organizations. These investigations set the foundation and
framework for future efforts. Soon after, CI established a second Cyber
Crimes Unit in the Los Angeles Field Office followed by cyber
coordinators across the Nation and additional support personnel to
provide investigative research and analysis. As staffing increased and
capabilities expanded, CI saw an exponential growth in the results
garnered. Steady and consistent funding will ensure that IRS-CI
maintains their role as the leader in cryptocurrency financial
investigations. The rampant growth of these financial crimes in the
cryptocurrency area (Ponzi schemes, rug pulls, romance scams, etc.)
demand the full attention of the Federal law enforcement community to
root out fraud and ensure the integrity of the U.S. financial system.
From FY 2014-FY 2015 when CI was first developing investigative
efforts around this area, CI went from a handful of cases to
approximately 150 in current inventory. Seizures associated with this
program area have increased dramatically from approximately $700,000 in
FY 2019 to current year values exceeding billions. CI Cyber Crimes
Investigative Time has remained constant at approximately 6 percent
based on the dedicated resources able to address this area of fraud.
With additional resources and staffing to this program area, CI would
expect to see similar and proportionate rates of growth in many of
these statistical areas. The number of victims of cryptocurrency frauds
continues to rise in the U.S. The funding associated with the Cyber
Crimes initiative significantly enhances CI's ability to access,
investigate and analyze information/evidence in an online environment.
Investigative tools focused on cryptocurrency tracing, cryptocurrency
tax basis calculations, dark web research, open-source intelligence and
social media information are continuously assessed to increase the
capabilities of CI personnel worldwide. These tools and resources will
work in conjunction with the Advanced Collaboration and Data Center
(ACDC) to provide a holistic framework for investigative action. ACDC
is a Cyber-led, technology-focused resource that enables investigations
through data, tools, and expertise. Its mission is to facilitate
collaboration internally and externally, as well as equip all field,
support, and cyber personnel with the tools and skills to drive the
IRS-CI Mission.
Case examples include:
Welcome to Video--10/16/19
https://www.justice.gov/opa/pr/south-korean-national-and-hundreds-
others-charged-worldwide-takedown-largest-darknet-child
Largest darknet marketplace for child exploitation.
Resulted in over 330 arrests and 23 kids saved who were
being actively abused.
Bitcoin Hamas--8/13/2020
https://www.justice.gov/opa/pr/global-disruption-three-terror-
finance-cyber-enabled-campaigns
Investigation revolved around cryptocurrency fundraising for
several terrorist organizations.
Hammas/Al Qaeda/ISIS used cryptocurrency fundraising
intended to carry out criminal acts.
IRS CI shut this down--largest crypto seizure tied to
terrorism to date.
Silk Road $1-billion Seizure--11/5/2020
https://www.justice.gov/usao-ndca/pr/united-states-files-civil-
action-forfeit-cryptocurrency-valued-over-one-billion-us
This case involved cryptocurrency CI traced which was stolen
from the administrator of Silk Road that we indicted several
years ago.
BITFINEX--2/8/2022
https://www.justice.gov/opa/pr/two-arrested-alleged-conspiracy-
launder-45-billion-stolen-cryptocurrency
Two individuals were arrested in Manhattan for an alleged
conspiracy to launder stolen cryptocurrency from a virtual
currency exchange, presently valued at approximately $4.5
billion. Thus far, law enforcement has seized cryptocurrency
valued over $3.6 billion linked to that hack.
BITCONNECT--2/25/2022
https://www.justice.gov/usao-sdca/pr/founder-fraudulent-
cryptocurrency-charged-2-billion-bitconnect-ponzi-scheme
Satishkumar Kurjibhai Kumbhani, a citizen and resident of
India, was indicted for his role in a massive criminal
conspiracy involving the cryptocurrency company he founded,
BitConnect.
Kumbhani and his co-conspirators defrauded global investors
of over $2 billion--believed to be the largest cryptocurrency
fraud ever charged.
conclusion
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you again for the opportunity to provide my perspective on this
critically important issue. I believe the additional funding provided
for the IRS in the IRA is a long-overdue game-changer for the agency,
but if it is just a temporary infusion of cash and not a multiyear
commitment, the service is likely to fail in its goals. As the adage
goes, ``You get what you pay for.'' The need to balance enforcement
with service is the magic mix that will be the difference between the
agency being seen as an elite, highly sophisticated agency that helps
taxpayers meet their obligations, or an agency that is heavy handed and
focuses too much on enforcing laws and not enough time on helping
others. For too long, the American public has picked up the tab for
underfunding IRS enforcement. By investing in the IRS, we are investing
in a set of institutions and infrastructure that are essential to the
success and prosperity of our Nation. I urge you to recognize the
critical importance of consistent funding for the IRS, and to take
action to ensure that the agency has the resources it needs to perform
its vital functions.
______
Question Submitted for the Record to John D. Fort
Question Submitted by Hon. Catherine Cortez Masto
Question. You note that only 6 percent of Criminal Investigation
reports come from civil referrals. This is a missed opportunity and the
result of a lack of investment in all areas of enforcement for many
years.
The IRS budget has declined by 20 percent in real dollars from 2010
to 2018 and saw 30 percent of its enforcement workers cut. In your
testimony, you noted that the voluntary compliance rate is estimated to
be roughly 84 percent, and every 1 percentage point in this level of
compliance costs the U.S. approximately $40 billion.
We know all too well on this committee that IRS does not have the
capacity to take calls from organizations to provide clarity nor enough
qualified staff to enforce the laws and rules that exist. This is why
every year we continue to discuss the dire need for additional
dedicated funding for the IRS to do its job.
How could additional dollars help increase enforcement and
compliance?
Answer. Ensuring effective tax enforcement and compliance is
crucial for maintaining a fair and functioning tax system. As I
testified, by increasing funding for the IRS, the government can
strengthen its capacity to detect non-compliance, deter tax evasion,
and promote voluntary compliance among taxpayers--these are priorities
everyone should support. As you note, one of the ways to increase
enforcement and compliance is to increase the number of civil audits
conducted on high-income individuals. Tax administration only works
when everyone is treated the same. Civil audits play a significant role
in identifying errors and discrepancies in tax returns, leading to
increased compliance among taxpayers. By allocating more resources to
the IRS in target areas, more audits can be conducted in a timely
manner. This is an important step and directly addresses one of the
inputs to the tax gap.
As you touched on in your question, another way to increase
enforcement and compliance is to increase the collaboration between the
civil and criminal functions of the IRS. While it is true that the
number of cases that IRS Criminal Investigation receives from civil
fraud referrals are lower than they should be, that number does seem to
be trending in the right direction with recent hiring in civil
divisions responsible for such referrals. It stands to reason those
further increases in these divisions--or the protection of future
funding for these divisions--would have a continued increase in
collaboration and fraud referral acceptance rates. Increased funding
can also support training programs and initiatives that promote
information sharing and coordination between these business operating
divisions.
Next, an increase in the size of IRS Criminal Investigation (CI)
would clearly have a positive impact on enforcement and compliance.
Both special agents and professional staff play a key role in bringing
the most impactful cases to the Justice Department for potential
prosecution. And with CI being the only Government organization that
can recommend Federal tax charges, it makes an increase in CI's
personnel a necessary recommendation. While CI will never arrest their
way out of tax crimes, impactful cases produce results and deterrence--
the combination of which increases compliance and enforcement.
Finally, to increase compliance and enforcement, funding should be
invested in data analytics and public-private partnerships. Advanced
data analytics can help identify patterns of non-compliance, detect tax
fraud schemes, and target high-risk taxpayers more effectively.
Moreover, collaborating with external partners, such as financial
institutions and technology companies, can enhance information sharing
and intelligence gathering, leading to improved enforcement outcomes.
Funding increases in personnel without investment in these two critical
areas is an investment that will not result in the greatest impact to
CI and the American taxpayers.
Based on my written and oral testimony, I believe it is clear I
believe increased funding is not only good for the IRS, but it is good
business policy for the United States. By increasing civil audits,
funding further collaboration between civil and criminal functions,
expanding the size the criminal division, and investing in data
analytics and public-private partnerships, you will increase the IRS's
capacity to combat tax evasion and promote voluntary compliance. Thank
you for the opportunity to answer your questions and speak about this
topic.
______
Submitted by Hon. Ron Johnson, a U.S. Senator From Wisconsin
Empower Oversight and Nixon Peabody LLP
May 15, 2023
The Honorable Ron Wyden The Honorable Jason Smith
Chairman Chairman
U.S. Senate U.S. House of Representatives
Committee on Finance Committee on Ways and Means
Co-Chair
Whistleblower Protection Caucus
The Honorable Mike Crapo The Honorable Richard Neal
Ranking Member Ranking Member
U.S. Senate U.S. House of Representatives
Committee on Finance Committee on Ways and Means
The Honorable Richard Durbin The Honorable Jim Jordan
Chairman Chairman
U.S. Senate U.S. House of Representatives
Committee on the Judiciary Committee on the Judiciary
The Honorable Lindsey Graham The Honorable Jerrold Nadler
Ranking Member Ranking Member
U.S. Senate U.S. House of Representatives
Committee on the Judiciary Committee on the Judiciary
The Honorable Charles Grassley
Member
U.S. Senate
Committee on Finance
Co-Chair
Whistleblower Protection Caucus
Dear Chairs and Ranking Members:
Today the Internal Revenue Service (IRS) Criminal Supervisory Special
Agent we represent was informed that he and his entire investigative
team are being removed from the ongoing and sensitive investigation of
the high-profile, controversial subject about which our client sought
to make whistleblower disclosures to Congress. He was informed the
change was at the request of the Department of Justice.
On April 27, 2023, IRS Commissioner Daniel Werfel appeared before the
House Committee on Ways and Means. He testified: ``I can say without
any hesitation there will be no retaliation for anyone making an
allegation or a call to a whistleblower hotline.'' However, this move
is clearly retaliatory and may also constitute obstruction of a
congressional inquiry.
Our client has a right to make disclosures to Congress pursuant to 26
U.S.C. Sec. 6103(f)(5) and 5 U.S.C. Sec. 7211. He is protected by 5
U.S.C. Sec. 2302 from retaliatory personnel actions--including
receiving a ``significant change in duties, responsibilities, or
working conditions''\1\ (which this clearly is) because of his
disclosures to Congress.\2\ Any attempt by any government official to
prevent a federal employee from furnishing information to Congress is
also a direct violation of longstanding appropriations restriction.\3\
Furthermore, 18 U.S.C. Sec. 1505 makes it a crime to obstruct an
investigation of Congress.
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\1\ 5 U.S.C. Sec. 2302(a)(2)(A)(xii).
\2\ 5 U.S.C. Sec. 2302(b)(8)(C).
\3\ The Consolidated Appropriations Act, 2023, Pub. L. 117-328,
Div. E, Sec. 713 states:
No part of any appropriation contained in this or any other
Act shall be available for the payment of the salary of any officer or
employee of the Federal Government, who--
(1) prohibits or prevents, or attempts or threatens to
prohibit or prevent, any other officer or employee of the Federal
Government from having any direct oral or written communication or
contact with any Member, committee, or subcommittee of the Congress in
connection with any matter pertaining to the employment of such other
officer or employee or pertaining to the department or agency of such
other officer or employee in any way, irrespective of whether such
communication or contact is at the initiative of such other officer or
employee or in response to the request or inquiry of such Member,
committee, or subcommittee[.]
We respectfully request that you give this matter your prompt
attention. Removing the experienced investigators who have worked this
case for years and are now the subject-matter experts is exactly the
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sort of issue our client intended to blow the whistle on to begin with.
Cordially,
Tristan Leavitt Mark D. Lytle
President Partner
Empower Oversight Nixon Peabody LLP
cc: The Honorable Michael Horowitz
Inspector General, U.S. Department of Justice
The Honorable Merrick Garland
Attorney General, U.S. Department of Justice
The Honorable Russell George
Inspector General for Tax Administration, U.S. Department of the
Treasury
The Honorable Daniel Werfel
Commissioner, Internal Revenue Service
The Honorable Henry Kerner
Special Counsel, Office of Special Counsel
______
Prepared Statement of Natasha Sarin, Ph.D., Associate Professor, Yale
Law School, Yale School of Management; and Former Treasury Counselor
for Tax Policy and Implementation
Chairman Wyden, Ranking Member Crapo, members of the committee,
thank you for inviting me to share my views on the importance of
adequately funding the Internal Revenue Service--and the generational
opportunity to improve our tax system presented by the Inflation
Reduction Act's $80-billion multiyear investment in the agency.
The IRS is critical to the functioning of our society. It collects
96 percent of the revenue that funds the Federal Government.\1\ It
touches just about every American household and business each year. It
is the largest administrator of Federal benefits in our government, and
it was responsible for disbursing critical support to millions of
families during the pandemic--for example, through three rounds of
Economic Impact Payments and advancing the Child Tax Credit.\2\
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\1\ Internal Revenue Service. 2023. ``IRS Releases Fiscal Year 2022
Data Book Describing Agency's Activities, Internal Revenue Service.''
April 14, 2023.
\2\ Internal Revenue Service. 2022. ``IRS Releases Its 2021
Progress Update Detailing Challenging Year, Internal Revenue Service.''
January 7, 2022.
It has done all of this, for far too long, without the resources in
place to serve taxpayers or administer the tax laws in the way the
American people deserve. Prior to the Inflation Reduction Act's (IRA's)
passage, the agency could not invest in hiring customer service
representatives to answer the phones, or experts in partnership law to
unpack passthrough returns, or computer scientists to overhaul the
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oldest IT system in the Federal Government.
It is no surprise then, that, in the year before the IRA was
passed, the agency's level of service (fraction of telephone calls
answered) hovered around 15 percent,\3\ or that it opened examinations
of just 7,500 partnership returns of the more than 4 million it
receives each year (an audit rate of approximately zero),\4\ or that
millionaire audits dropped off by more than 80 percent in the last
decade,\5\ or that the functionality of the taxpayer online account was
decades behind what you see in the private sector.
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\3\ National Taxpayer Advocate. 2023. ``National Taxpayer Advocate
Delivers 2022 Annual Report to Congress; Focuses on Taxpayer Impact of
Processing and Refund Delays, Internal Revenue Service.'' Internal
Revenue Service. January 11, 2023.
\4\ Yellen, Janet, and U.S. Department of the Treasury. 2022.
``Secretary of the Treasury Janet L. Yellen Sends Letter to IRS
Commissioner in Support of Funding for IRS to Improve Taxpayer Service
and Combat Evasion by High Income Earners and Corporations.'' U.S.
Department of the Treasury. August 10, 2022.
\5\ See Table 2, below.
The IRA makes a much-needed, once-in-a-generation investment in the
IRS to modernize America's system of tax administration and, by doing
so, meaningfully increase compliance with the Nation's tax laws. This
is a substantial opportunity for the agency and for the Nation's fiscal
situation, and this investment is already starting to reap dividends.
Thanks to the IRA, the IRS achieved an 87-percent level of service this
year--up about 315 percent in just 12 months. Among other
accomplishments, the agency answered 2 million more calls this year,
cut average phone wait times from 27 minutes to 4 minutes, served
100,000 more taxpayers in person, digitized 80 times more returns by
adopting scanning technology, cleared filing backlogs, and more quickly
processed tax returns and taxpayer refunds.\6\
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\6\ U.S. Department of the Treasury. 2023. ``Filing Season 2023
Report Card: IRS Delivered Significantly Improved Customer Service.''
U.S. Department of the Treasury. April 17, 2023.
In addition to these meaningful service improvements, over the
course of the last several months the IRS has also begun to overhaul
its tax compliance efforts. This is an area where the agency's nascent
efforts have been subject to substantial confusion and
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misinterpretation.
So, in my testimony today, I would like to make four points about
noncompliance in our tax system and the importance of the IRA's
investment. First, the tax gap, which is the difference between owed
and collected taxes, is large--more than 2 percent of GDP on an
annualized basis. This means that even marginal improvement with
respect to compliance will have a meaningful impact on our Nation's
fiscal position and help address large and growing deficits. Second,
the tax gap is concentrated at the top of the income distribution, and
it is here that the agency has struggled most in recent years, due to
resource constraints. Thus, addressing tax evasion by sophisticated,
high-income taxpayers, large corporations, and partnerships is
appropriately where the IRS is focused on expending its new resources.
Third, investments to address noncompliance are likely to raise much
more than official government estimates suggest: My recent work with
former Assistant Secretary for Tax Policy Mark Mazur suggests they
could reap around $560 billion in additional tax collection ($480
billion net of IRA's investment) over the next decade.\7\ And fourth,
the benefits of investing in the IRS go beyond revenue collection, as
new resources will address longstanding inequities in our tax system
and decrease taxpayer burden.
---------------------------------------------------------------------------
\7\ Sarin, Natasha, and Mark Mazur. 2023. ``The Inflation Reduction
Act's Impact on Tax Compliance--and Fiscal Sustainability.''
---------------------------------------------------------------------------
1. the tax gap is large--greater than 2 percent of gdp annually
The IRS regularly releases estimates of the Federal tax gap. The
most recent estimates cover tax years 2014-2016, where the agency
reported a gross tax gap (the difference between taxes legally owed and
those voluntarily paid) of around $500 billion annually, which grew to
$540 billion in 2019, adjusted for growth and inflation. Enforcement
efforts help the agency chip away at this total, but it remains
substantial--of 2019 taxes owed, the IRS failed to collect $470 billion
even after accounting for its audit and collection efforts.\8\
---------------------------------------------------------------------------
\8\ Internal Revenue Service. 2022. ``Federal Tax Compliance
Research: Tax Gap Estimates for Tax Years 2014-2016''; Internal Revenue
Service. 2022. ``IRS Updates Tax Gap Estimates; New Data Points the Way
toward Enhancing Taxpayer Service, Compliance Efforts, Internal Revenue
Service.''
To put that number into context, it represents 2.2 percent of total
GDP in 2019.\9\ It was a whopping 47 percent of the total budget
deficit in that year.\10\ So, if the United States was able to collect
the taxes that were already on the books, deficits would shrink by
nearly half. That's without any tax increases or cuts to vital programs
like food stamps, veterans' benefits, and Medicaid.
---------------------------------------------------------------------------
\9\ Bureau of Economic Analysis. 2023. ``Gross Domestic Product,
U.S. Bureau of Economic Analysis (BEA).''
\10\ U.S. Department of the Treasury. 2023. ``Fiscal Data Explains
the National Deficit.'' 2023.
And the IRS's tax gap estimate is likely an understatement of true
evasion in the economy. To estimate compliance with the individual
income tax, the IRS uses a random sample of a few thousand individual
income tax returns each year that are representative of the income tax
returns filed for that year. But for other components of the tax gap
(e.g., corporate income tax, employment taxes, noncompliance by pass-
through entities), the IRS does not conduct similar studies, so it
relies on data sources that are less robust. The IRS is explicit that
its ability to measure noncompliance in these areas is limited: it
cannot ``fully represent noncompliance in some components of the tax
system, particularly as they relate to corporate income tax, income
from flow-through entities, foreign or illegal activities, and digital
assets.''\11\
---------------------------------------------------------------------------
\11\ Internal Revenue Service. 2022. ``Federal Tax Compliance
Research: Tax Gap Estimates for Tax Years 2014-2016.''
The problem of mismeasurement exists even for the individual income
tax gap, where for taxpayers at the top of the income distribution, it
is possible to shield income, even from audit.\12\ So, the net tax gap
as measured--which, if left unaddressed, will grow to $7.7 trillion
over the course of the next decade--is a lower bound on the true scale
of noncompliance today.
---------------------------------------------------------------------------
\12\ Recent academic work suggests that evasion by sophisticated
taxpayers is underestimated in official IRS estimates because it fails
to account for these effects. Guyton, John, Patrick Langetieg, Daniel
Reck, Max Risch, and Gabriel Zucman. 2021. ``Tax Evasion at the Top of
the Income Distribution: Theory and Evidence.''
To be sure, eliminating the tax gap entirely is an impossible
objective. No matter how many resources the IRS marshals, some tax
---------------------------------------------------------------------------
evasion will persist.
But the fact that such a significant source of revenue exists that
is legally owed, but uncollected, means that investments in addressing
the tax gap, like the IRA's investment in the IRS, are a vital tool in
addressing our Nation's fiscal imbalances. Conversely, the failure to
invest sufficiently in the IRS--or, defunding the IRS, as some critics
have called for--will meaningfully add to our deficits and threaten our
long-term fiscal sustainability.
2. the tax gap is concentrated
While at the Treasury Department, I estimated the distribution of
the tax gap, concluding that the top 1 percent of the income
distribution is responsible for nearly 30 percent of unpaid taxes, or
about $2 trillion over the next decade.\13\
---------------------------------------------------------------------------
\13\ Sarin, Natasha. 2021. ``The Case for a Robust Attack on the
Tax Gap.'' U.S. Department of the Treasury.
The actual number is likely higher for the reasons of
mismeasurement discussed above. Because the IRS struggles to estimate
the noncompliance of high-income individuals engaging in tax evasion
and the corporations and pass-through entities they own, current
measures of the distribution of the tax gap overstate the share of tax
evasion that is attributable to the bottom and the middle of the income
distribution. Getting a clearer picture of the size of the tax gap and
its distribution is critical to the IRS's compliance efforts going
forward to help the agency set an appropriate baseline and delineate
---------------------------------------------------------------------------
progress as it invests in its ability to police high-end evasion.
It is worth noting briefly that a challenge with respect to
distributional analysis is how best to classify individuals across the
income distribution. Official scorekeepers do not impute unreported
income in the individual tax model, so current analyses do not provide
an overall distribution of unreported income. In the context of recent
legislative debates, the Joint Committee on Taxation (JCT) provided an
assessment of unreported Schedule C income earned by proprietors,
concluding that over half accrues to those making less than $50,000
annually. But these estimates are based on classifying taxpayers by
reported income, rather than true income. And of course, taxpayers who
choose to evade their tax liabilities most often do so by
underreporting their true level of income. A distribution of Schedule C
income based on post-audit income paints a very different picture, as
the table below makes clear.
Table 1: Proprietorship, Partnership, and S-Corporation Income
------------------------------------------------------------------------
Proprietorship Income Partnership and S-Corporation
(Schedule C) Income (Schedule E)
Filer Category ---------------------------------------------------------
Reported Adjusted Reported Adjusted
------------------------------------------------------------------------
Less than $0 5% 0% 6% 0%
------------------------------------------------------------------------
$0 to $50,000 52% 13% 34% 3%
------------------------------------------------------------------------
$50,000 to 21% 20% 25% 14%
$100,000
------------------------------------------------------------------------
$100,000 to 12% 26% 13% 27%
$200,000
------------------------------------------------------------------------
$200,000 to 6% 17% 14% 22%
$500,000
------------------------------------------------------------------------
\14\Id.;
Barthold,
Thomas. 2021.
``Distributio
nal
Information.'
' Official
memorandum.
Washington,
DC: Congress
of the United
States, Joint
Committee on
Taxation.
$500,000 and 4% 24% 9% 35%
over
------------------------------------------------------------------------
Source: IRS National Research Program and Congress of the United States,
Joint Committee on Taxation.\14\
Why does this sort of distributional analysis matter? As the
administration made the case for the importance of investing in the IRS
in the lead-up to the IRA's passage, it focused on addressing high-end
evasion by sophisticated taxpayers. It is here that the IRS has lost
the most capacity: audit coverage fell across the board but decreased
most at the very top of the income distribution. And coverage has been
essentially nonexistent (an audit rate of less than 0.05 percent in
2019, declining from just 0.4 percent in 2010) for complex tax
structures like partnerships, which have grown to represent more than
35 percent of total business income.\15\
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\15\ Internal Revenue Service. 2023. ``Internal Revenue Service
Strategic Plan''; U.S. Department of the Treasury. 2021. ``The American
Families Plan Tax Compliance Agenda.''
Table 2: Decline in Audit Rates Across Filer Categories
------------------------------------------------------------------------
Percent Audited
Filer Category ---------------------- Percent Decline
2010 2019 (2010-2019)
------------------------------------------------------------------------
All filers 0.9% 0.4% -58.1%
------------------------------------------------------------------------
Individuals 1.1% 0.4% -63.9%
------------------------------------------------------------------------
EITC recipients 2.4% 1.1% -53.1%
------------------------------------------------------------------------
$1 million-$5 million 6.7% 1.0% -84.7%
------------------------------------------------------------------------
$5 million-$10 million 11.6% 1.4% -87.9%
------------------------------------------------------------------------
$10 million + 18.4% 3.9% -78.8%
------------------------------------------------------------------------
Corporations 1.4% 0.7% -49.6%
------------------------------------------------------------------------
with assets over $20 billion 97.9% 49.9% -49.1%
------------------------------------------------------------------------
Employment 0.2% 0.1% -52.4%
------------------------------------------------------------------------
Estates 10.1% 6.9% -31.9%
\16\ Internal Revenue Service.
2010. ``IRS Data Book.'';
Internal Revenue Service. 2019.
``IRS Data Book.''; U.S.
Government Accountability
Office. 2022. ``Tax Compliance:
Trends of IRS Audit Rates and
Results for Individual
Taxpayers by Income.'' Note
that the 2019 Data Book
provides a crosswalk of the
tables, and the IRS did not
publish the number of audits
collected on individual filers
with incomes of $1 million, $5
million, or $10 million and
above in that year. The figures
for those numbers were obtained
from the GAO, which used 2019
IRS tax data to calculate the
audit rate by filer income
status.
------------------------------------------------------------------------
Source: The data in this table was collected from Tables 9a, 9b, and 17b
in the IRS Data Books from 2010 and 2019. The IRS stopped releasing
audit data for filers by different income brackets. Data for 2019 was
supplemented with Table 3 audit rates data from the Government
Accountability Office which was released in 2022.\16\
Critics of the IRS have focused on inaccurate estimates of the
distribution of noncompliance to argue that there is not enough evasion
at the top of the distribution to merit these additional investments.
An appropriate analysis of the distribution of noncompliance today
reveals that this concern is misplaced.
Both because their tax bills are so large, and because the IRS's
capacity at the top of the distribution has declined so drastically
over the course of the last decade, this is also where returns to
additional enforcement activity are greatest. So it is here where,
consistent with the Secretary of the Treasury's very clear directive,
and the Commissioner of the IRS's commitment, new enforcement resources
will appropriately be focused.
3. investing in the irs could raise over $500 billion
in new tax revenue this decade
When the Congressional Budget Office (CBO) assessed the revenue
impact of new investments in the IRS, it concluded that they would
raise nearly $200 billion in new tax collections (or around $115
billion, net of the cost of new investments).\17\ Conversely, as CBO
has weighed in on legislation that would rescind the majority of the
new funds the agency has received, it has concluded that budget
deficits would rise by a similar magnitude over the course of the next
decade if these investments in the agency were rolled back.\18\
---------------------------------------------------------------------------
\17\ CBO has released multiple estimates of the additional tax
revenue that can be collected by investing in the IRS. In 2021, CBO
estimated the returns to a roughly $80 billion investment in the agency
and concluded it would generate almost $200 billion in new tax revenue
(for a net figure for revenue raised of about $115 billion). (Swagel,
Phil, and Congressional Budget Office. 2021. ``The Effects of Increased
Funding for the IRS.'')
\18\ In 2022, after the Inflation Reduction Act's passage, CBO
updated its estimate largely for changes in the legislative language,
saying that the IRA's investment in the IRS would increase tax revenues
by approximately $180 billion over the decade. (See Congressional
Budget Office. 2022. ``Additional Information About Increased
Enforcement by the Internal Revenue Service.'') Most recently, in 2023,
in scoring a potential recission of the majority of these funds, CBO
came to a slightly different revenue estimate of $186 billion, likely
related to changes in the 10-year budget window. (Congressional Budget
Office. 2023. ``Estimated Budgetary Effects of H.R. 23, the Family and
Small Business Taxpayer Protection Act, Congressional Budget Office.'')
While directionally correct, I believe this conclusion understates
the likely return to the substantial long-term investments in the IRS
made in the IRA. Mark Mazur and I estimate that the IRA could raise
around $560 billion in new tax collection in this decade ($480 billion
net of investment), or more than three times official scorekeepers'
estimates. Depending on the extent of taxpayers' behavioral response,
---------------------------------------------------------------------------
the total could easily be closer to $1 trillion.
The value of investing in the IRS grows over time, in part because
investments in improving information technology and overhauling
compliance efforts directed at high-income earners take years to pay
off in full. By the second decade, our baseline estimate suggests that
new IRA resources will lead to upwards of $1.5 trillion in total new
tax collection, assuming the IRA investments in the IRS are extended.
To be sure, this revenue estimate is large. But it is important to
put this estimate in context given the scope of tax evasion in the
United States today. Over the decade, our baseline estimate is that the
IRS will capture just 7 percent of the tax gap which, left unaddressed,
would otherwise total more than $7.7 trillion over this period. That is
sizable progress that will reap benefits for the Nation's fiscal
position--but it is modest given the size of the tax gap.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
What drives the differences between our estimate and official
government estimates? There are several aspects of IRS investments that
are underestimated or even ignored by government estimators.
First, official scorekeepers rely on the historical returns to
enforcement activities to come to estimates of the gains from new
investments, which have averaged around 4:1.\19\ But these historical
ROI figures do not account for the fact that the IRS is starting from a
nadir with respect to its enforcement efforts.
---------------------------------------------------------------------------
\19\ Internal Revenue Service. 2022. ``Congressional Budget
Justification and Annual Performance Report and Plan.''
Official models also do not capture the higher returns associated
with pursuing high-end and complex noncompliance, and this is where the
IRS is deploying new enforcement resources.\20\ Further, these
estimates include a substantial downward adjustment for diminishing
marginal returns, based on the view that the additional revenue
potential of investments in the agency declines as more investments are
made. While this is certainly true in theory, in practice an agency
that has an audit rate of essentially zero in areas of high complexity
where evasion is rampant has a ways to go before hitting diminishing
returns to new dollars invested.
---------------------------------------------------------------------------
\20\ As one datapoint, as Treasury Inspector General for Tax
Administration Russell George has pointed out in the past, an extra
hour spent auditing a taxpayer who makes $5 million or more annually
generates thousands of dollars (his 2021 estimate was over $4,500). See
U.S. Congress, Senate, Committee on Finance, Closing the Tax Gap: Lost
Revenue From Noncompliance and the Role of Offshore Tax Evasion,
Hearing before the Subcommittee on Taxation and IRS Oversight. 117th
Cong., 1st sess., May 11, 2021.
Additionally, the way government models assess the revenue impact
of IRS investments focuses only on the returns to new enforcement
dollars, with the implicit assumption that the IRA's investment in
taxpayer service and modernized information technology will have no
impact on taxpayer compliance. It seems intuitive that, for example,
because the IRS was able to answer 87 percent of the calls that it
received this year, thanks to new IRA resources, it has been able to
help more taxpayers than last year, when it answered just 13 percent of
the phone inquiries it received. And yet the compliance benefits from
such investments are counted as zero in official tallies.\21\
---------------------------------------------------------------------------
\21\ Prior academic work that taxpayers respond to agency-provided
information services by increasing compliance, see e.g., McKee,
Michael, Caleb A. Siladke, and Christian A. Vossler. 2018. ``Behavioral
Dynamics of Tax Compliance When Taxpayer Assistance Services Are
Available.'' International Tax and Public Finance which includes a
summary of related literature. In a different setting, researchers
found that IRS-provided information on penalties paid for lacking
health insurance coverage increased insurance coverage and decreased
mortality. Goldin, Jacob, Ithai Z Lurie, and Janet McCubbin. 2021.
``Health Insurance and Mortality: Experimental Evidence from Taxpayer
Outreach.'' The Quarterly Journal of Economics 136 (1): 1-49. This is
an area where more research, especially following the IRA's investment,
will be valuable.
Further, improved technology will allow the IRS to make better use
of information it receives and make more efficient choices when
deploying new resources. For example, the IRS today is not making full
use of the data it receives from the Foreign Account Tax Compliance Act
(FATCA) on offshore bank account holdings, because it does not have the
IT capacity needed to absorb and deploy this data.\22\ This is why the
agency's focus on ``maximizing data utility,'' detailed in the recently
released IRS Strategic Operating Plan, is of such import.\23\
---------------------------------------------------------------------------
\22\ U.S. Government Accountability Office. 2019. ``Foreign Asset
Reporting: Actions Needed to Enhance Compliance Efforts, Eliminate
Overlapping Requirements, and Mitigate Burdens on U.S. Persons
Abroad.''
\23\ Internal Revenue Service. 2023. ``Internal Revenue Service
Strategic Plan.''
The largest driver of the difference between our and official
scorekeepers' estimates has to do with our view of the importance of
behavioral changes when taxpayers become aware that there are more tax
police on the IRS beat. In the past, CBO has included only direct
effects in its revenue estimates.\24\ It recently began thinking about
the role of behavioral effects, but concluded these were small in
magnitude.\25\ We believe, on the basis of past empirical work on this
question, that the magnitude is significantly larger.\26\
---------------------------------------------------------------------------
\24\ Congressional Budget Office. 2020. ``Trends in the Internal
Revenue Service's Funding and Enforcement.''
\25\ Swagel, Phil, and Congressional Budget Office. 2021. ``The
Effects of Increased Funding for the IRS.''
\26\ See e.g., Boning, W.C., J. Guyton, R. Hodge, and J. Slemrod.
2020. ``Heard it through the grapevine: The direct and network effects
of a tax enforcement field experiment on firms.'' Journal of Public
Economics 190(3-4): 104261
Taxpayer behavior is impacted by IRS enforcement efforts in two
ways. First, there is a self-deterrent effect: taxpayers who make
errors that the IRS identifies are unlikely to repeat them in future
years. Second, there is a community deterrent effect: taxpayers who
observe a well-resourced IRS are more likely to follow the laws on the
books. In the same way that a State trooper on the highway median
encourages driving within the speed limit, improved IRS enforcement
efforts encourage compliance with the tax laws. Treasury has previously
stated that deterrent effects are likely three times the size of direct
effects.\27\ Yet our estimates adopt a very conservative deterrence
factor of just one, essentially equaling the size of the direct effects
measured by increased revenue collection from enforcement actions such
as audits.
---------------------------------------------------------------------------
\27\ Internal Revenue Service. 2019. ``Program Summary by Budget
Activity.''
So, our $480-billion estimate of the net gains from IRA enforcement
activities strikes us as more likely to be an underestimate than an
overestimate of how much the IRS investment will add to the fisc in the
decade ahead. Treasury's 3-to-1 deterrence factor would raise the
revenue collected over the course of the next decade to more like $1
trillion, in line with prior academic estimates of the large returns to
the IRS modernization efforts.\28\
---------------------------------------------------------------------------
\28\ See e.g., Sarin, Natasha, and Lawrence Summers. 2020. ``CBO
Recognizes, but Understates, Potential of Tax Compliance Efforts.'' Tax
Notes, July 20, 2020; Rossotti, Charles, and Fred Forman. 2020.
``Recover $1.6 Trillion, Modernize Tax Compliance and Assistance,'' Tax
Notes, March 2, 2020.
The importance of this fiscal moment provides greater urgency to
the IRA's historic investment in the IRS, and it also reflects the
importance of accurately assessing the revenue potential of the long-
term investment that Congress has authorized. For example, in the
context of debt ceiling negotiations, some have proposed rescinding the
IRA's investment in the agency, citing the inaccurate view that
increased enforcement efforts will inevitably cause an uptick in burden
---------------------------------------------------------------------------
for ordinary taxpayers.
I believe it is important to appreciate how much progress has been
made by investing in the IRS--and also how much there is to lose from
defunding the agency as some have recommended. The same will be true in
the context of appropriations conversations in the years ahead: if this
mandatory funding has to be deployed to plug shortfalls in ongoing
year-to-year operations rather than on modernization efforts, this will
bear meaningfully on the revenues that the IRS is ultimately able to
collect.
To be sure, the success of the IRS in collecting the revenue we
estimate from a robust attack on the tax gap is not a given. The agency
will have to deploy these resources and modernize in such a way that it
is able to collect from sophisticated taxpayers who have at their
disposal significant resources and the assistance of a bevy of tax
advisors to continue to skirt the rules. It will need to recruit new
types of talent--partnership law experts, data scientists, economists,
technologists--to quickly ramp up complex enforcement efforts. In the
years ahead, it will be imperative for Congress, in its oversight
capacity, to continue to monitor the progress of the agency and help to
course correct as modernization efforts get underway.
But it is also important not to understate the historic investment
that you have made in the IRS--an investment in the fiscal
sustainability of our Nation's finances that it is imperative to
preserve and supplement, rather than diminish, in the years ahead.
4. investing in the irs will create a more equitable tax system
Investing in a 21st-century tax administrator helps important tax
policy goals beyond revenue. Perhaps even more important are efforts to
address the deep inequities of a tax system that does not have
resources in place to police evasion by a select few.
Regular American taxpayers--the vast majority of your
constituents--earn wages and find their taxes automatically withheld,
so generally they pay their tax obligations on that income in full:
Compliance rates are 99 percent on wages and salary income. And yet
opaque sources of income have compliance rates of around 50 percent--
and these types of income are disproportionately earned by the most
sophisticated and high-income taxpayers.\29\ This creates a two-tiered
tax system where most Americans today pay all that they owe, but some
do not.
---------------------------------------------------------------------------
\29\ Internal Revenue Service. 2022. ``Federal Tax Compliance
Research: Tax Gap Estimates for Tax Years 2014-2016.''
Most Americans feel that some corporations and wealthy people do
not pay their fair share.\30\ They are right to feel that way: They do
not. And they will not, until the IRS has the resources that it needs
to pursue noncompliance so sophisticated taxpayers that choose to evade
their liabilities bear costs that are sufficient to deter future
malfeasance. Addressing evasion will alleviate a tax on compliant
taxpayers that arises from the fact that future government funding
needs that result in tax increases are borne only by the population
that is law-abiding. It will also remove a competitive disadvantage
from our Nation's economy, where those who are civically responsible
and pay their taxes in full can be undercut by competitors who choose
to evade and pocket tax savings.
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\30\ Oliphant, J. Baxter. 2023. ``Top Tax Frustrations for
Americans: The Feeling That Some Corporations, Wealthy People Don't Pay
Fair Share.'' Pew Research Center. April 7, 2023.
There is a related benefit to the IRS's enforcement efforts that is
perhaps counterintuitive at first. For honest taxpayers, the impact of
an IRS with more compliance resources will be a lower burden associated
with enforcement activities--not a higher one. Historically, with
outdated technology and blunt enforcement tools, the IRS has struggled
to separate taxpayers who have complied with their tax obligations from
those who have not. But with improved data, the agency will be able to
gain a more fulsome picture of taxpayer behavior, and thus identify
discrepancies, in a way that it simply cannot today. This means the
likelihood of an audit for a compliant taxpayer will go down, not up,
---------------------------------------------------------------------------
in the years ahead.
It will be on the IRS to show how taxpayer burden is decreased, but
the likelihood of being wrapped up in a costly enforcement process
should decline as the agency is better able to target scrutiny where it
belongs--on high-income evaders, as opposed to those who are fully
compliant with their tax obligations today.
Given that the IRS touches nearly every household and business each
year, I believe strongly that recent investments in the agency will
meaningfully improve trust in the tax administrator in ways that are
consequential for the IRS and the Federal Government writ large. A
demonstrably more equitable system of tax administration has the virtue
proving the value and importance of good government to the American
populace.
______
Prepared Statement of Pete Sepp, President, National Taxpayers Union
Chairman Wyden, Senator Thune, and members of the committee, I am
honored by your invitation to present the following comments concerning
the issues of Internal Revenue Service (IRS) funding, particularly as
it relates to enforcement of Federal tax laws and overall Federal
finances.
introduction
My name is Pete Sepp, and I am President of National Taxpayers
Union (NTU), a nonpartisan citizen group founded in 1969 to work for
less burdensome taxes, more efficient, accountable government, and
stronger rights for all taxpayers. More about our work as a non-profit
grassroots organization is available at www.ntu.org.
Although we advocate for many structural changes to the tax system,
from the comprehensive to the incremental, one common aspect on which
NTU often specifically focuses is the administrability of such
proposals. As policymakers define the rates, bases, deductions,
credits, and other features of a tax system, what will the practical
impact be on taxpayers' lives and their rights? Unless this question is
adequately addressed, the result will be a tax system that burdens all
and serves none. Taxpayers will be more fearful or mistrustful of their
government, revenue officials will encounter greater difficulty in
performing their public service, tax practitioners will become
increasingly frustrated with complex rules, and all sectors of the
economy will pour too many productive resources into compliance tasks
that only marginally affect actual compliance.
For these reasons, throughout its history NTU has led efforts in
support of congressional legislation to improve operations of the
Internal Revenue Service (IRS) and provide greater balance in the tax
law enforcement process. During the late 1970s and 1980s, NTU informed
Congress of taxpayers who experienced IRS maladministration firsthand,
as well as organized a large coalition of civil liberties organizations
that successfully persuaded Congress to enact the first ``Taxpayers'
Bill of Rights'' as part of the Technical and Miscellaneous Revenue Act
of 1988.
In 1996 and 1997, NTU's then-executive vice president David Keating
was named to the National Commission on Restructuring the Internal
Revenue Service (``Restructuring Commission''), a Federal panel whose
recommendations later became the basis for the most extensive IRS
overhaul in a generation.\1\
---------------------------------------------------------------------------
\1\ For background, see National Commission on Restructuring the
IRS. ``A Vision for a New IRS.'' June 25, 1997. Available from: https:/
/cybercemetery.unt.edu/archive/natcommirs/20160104232208/http://
www.house.gov/natcommirs/object.htm.
More recently we worked with the IRS National Taxpayer Advocate
(NTA) and Congress in promulgating and finally codifying (in 2015) a
set of 10 fundamental taxpayer rights. We also led a large coalition of
organizations to formulate and pass through Congress the bipartisan
Taxpayer First Act of 2019--and gratefully participated in the
extensive stakeholder consultation process after enactment that led to
the production of the comprehensive Taxpayer First Act Report of early
---------------------------------------------------------------------------
2021.
Since that time, NTU has also urged a cautious, deliberative
approach--but not wholesale opposition--to proposals for increased IRS
funding. As I wrote in The New York Times in October 2021, supporting
additional IRS funding:
More resources for customer service, taxpayer rights
safeguards, a functioning Oversight Board, actionable and
regularly updated research on the tax gap and innovative
approaches such as the recently proposed enforcement fellowship
pilot program are all solutions that should unite
Washington.\2\
---------------------------------------------------------------------------
\2\ Sepp, Pete. ``I'm the President of the National Taxpayers
Union. Be Careful with I.R.S. Reform.'' New York Times. October 18,
2021. https://www.nytimes.com/2021/10/18/opinion/tax-irs-reform.html.
Thus, we do not appear before the committee to advocate blocking
all additional funding for the IRS, and would indeed argue that locking
in certain multiyear appropriations for IRS investments (e.g.,
Information Technology) is sensible.\3\ In fact, it is this history of
my organization that informs much of the remarks to follow about the
present and future circumstances of IRS funding and Federal finances.
---------------------------------------------------------------------------
\3\ In 2021, former IRS Commissioner John Koskinen observed the
following about the $80 billion of additional IRS funding contained in
the Biden administration's American Families Plan: ``I'm not sure you'd
be able to efficiently use that much money.'' Rappeport, Alan, and
Tankersley, Jim. ``Biden Seeks $80 Billion to Beef Up IRS Audits of
High Earners.'' New York Times. April 27, 2021. https://
www.nytimes.com/2021/04/27/business/economy/biden-american-families-
plan.html.
Here I wish to acknowledge the outstanding contributions to this
testimony from several of my colleagues at National Taxpayers Union and
National Taxpayers Union Foundation: Joe Bishop-Henchman, executive
vice president of National Taxpayers Union Foundation; Demian Brady,
vice president of research, National Taxpayers Union Foundation; Andrew
Lautz, former director of Federal policy; and Andrew Wilford, director
of the Interstate Commerce Initiative, National Taxpayers Union
Foundation. Their research and writing has greatly informed and
improved the document you are reading today.
political realities: both parties must lead on sound tax
administration, and both have shown they can do it together
Before turning to the details of the topic at hand, NTU urges all
members of the committee to recognize several important, yet
inescapable political realities confronting Washington today.
First, the votes in the House of Representatives to claw back the
IRS funding designated for ``enforcement'' in the Inflation Reduction
Act (IRA) are as far in the legislative process as these proposals will
go--it cannot be realistically argued that they could pass the Senate
intact, much less survive a presidential veto. Nor, given the political
state of Congress, will the appropriations or reconciliation processes
permit the House Republican majority to make massive IRS budget
reductions for the next 2 fiscal years. Even if that political state
changes in 2025, as a practical matter no significant alterations to
the current IRS funding amount would be likely until Fiscal Year 2026.
Knowing this, opponents of the IRA must turn their immediate
attention to how this amount should best be spent.
Second, both the House and Senate Democratic caucuses have
historically insisted upon strict congressional planning, guidance, and
oversight of Federal law enforcement programs and the agencies carrying
out those programs. For example, when several PATRIOT Act provisions
regarding surveillance were up for renewal in 2011, Rep. John Conyers
(D-MI) said:
Section 215 of the PATRIOT Act allows a secret FISA court to
authorize our government to collect business records or
anything else, requiring that a person or business produce
virtually any type [of] record. We didn't think that that was
right then. We don't think it's right now. This provision is
contrary to traditional notions of search and seizure which
require the government to show reasonable suspicion or probable
cause before undertaking an investigation that infringes upon a
person's privacy.\4\
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\4\ See, ontheissues.org. Debate over RESTORE Act. March 14, 2008.
https://www.ontheissues.
org/MI/John_Dingell_Homeland_Security.htm.
In 2016, after Congress learned of civil asset forfeiture laws
being wielded unfairly against taxpayers, the late Rep. John Lewis (D-
GA) joined with then-Rep. Peter Roskam (R-IL) in support of taxpayer
protections in the DUE PROCESS Act. Chairman Lewis said at the time,
``I have never, ever seen in a very long time, this degree, this spirit
of togetherness. On this issue, we are on one accord.''\5\ Chairman
Lewis, who I had the honor to meet in 2017, inspired our organization
when he said of the Taxpayers First Act, ``even in the most difficult
times, we can come together as a Nation, as a people and as a Congress
to accomplish important things for the American people.''\6\ Democrats
should be proud of their tradition in supporting taxpayer rights,
counting among other leaders on this issue David Pryor (D-AR), J.J.
Pickle (D-TX), and Harry Reid (D-NV).
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\5\ See, Sibilla, Nick. ``After Sending Armed Agents to Seize Bank
Accounts, IRS Announces New Policy to Return Assets.'' Forbes. June 24,
2016. https://www.forbes.com/sites/institutefor
justice/2016/06/24/irs-structuring-policy/?sh=393caba51a87.
\6\ See, Sepp, Pete. ``An Appreciation: Congressman John Lewis,
1940-2020.'' National Taxpayers Union. July 27, 2020. https://
www.ntu.org/publications/detail/an-appreciation-congressman-john-lewis-
1940-2020.
With this history, supporters of the IRA must turn their immediate
attention to applying the same general philosophy behind these examples
from other parts of Federal law enforcement, to how the IRS should
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operate when it acts in a law enforcement capacity.
The third reality is more pleasant and hopeful. For decades, NTU
has seen bipartisan collaboration and cooperation on a variety of tax
administration initiatives to improve the way the IRS works while
enhancing compliance with the law and protecting taxpayer rights. Our
testimony will provide abundant opportunities for building upon this
bipartisan comity in a later section.
historical reality: irs transformation won't succeed
without congressional planning, oversight
But why should bipartisan comity on tax administration matter at
this particular point in time? The history of IRS funding provides an
instructive, and urgent, reason why.
Although much has been made of IRS budget reductions as if they
followed a straight line according to which party was in power, on an
inflation-adjusted basis, the history of IRS funding from 1992-2022 is
best described as peaks and valleys. After hitting a low in 1997, IRS
resources increased significantly through the year 1999, recovering
after a dip to reach more than $14 billion (in 2022 dollars) in 2006.
Then began an uneven path to a new height of nearly $15 billion in
2011, and once more taking considerable declines until 2019. Today,
after accounting for inflation, IRS funding is only moderately higher
than it was 5 years ago.\7\
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\7\ See Brady, Demian. ``What the IRS's New Enforcement Budget
Means for Taxpayers.'' National Taxpayers Union Foundation. September
21, 2022. Retrieved from: https://www.ntu.org/foundation/detail/what-
the-irss-new-enforcement-budget-means-for-taxpayers. Also, Bishop-
Henchman, Joseph. ``Transforming the Internal Revenue Service.'' Cato
Institute Policy Analysis No. 942. April 11, 2023. https://
www.cato.org/policy-analysis/transforming-internal-revenue-service.
It should be noted that two of the three major IRS funding ramp-ups
occurred after enactment of key IRS reform laws (the IRS Restructuring
and Reform Act, or RRA 98 and the Taxpayer First Act, or TFA 2019).
Both bills passed with near-unanimous margins in Congress. The third
was connected to several events, including implementation of the
American Recovery and Reinvestment Act of 2009 and the Affordable Care
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Act of 2010.
The point we wish to emphasize here is that major investments in
the IRS's capacity have been preceded by extensive legislating from
Congress, in close consultation with IRS leadership. RRA 98, for
example, was fundamentally shaped by the 18-member National Commission
on Restructuring the IRS, and appointed by Congress and the executive
branch. According to its nearly 200-page report, over the course of a
year of operation:
The Commission received extensive input from American taxpayers
and experts in the IRS and tax system, holding 12 days of
public hearings and spending hundreds of hours in private
sessions with public and private sector experts, academics, and
citizen's groups to review IRS operations and services. In
addition to holding three field hearings . . . the Commission
met privately with over 500 individuals, including senior-level
and front-line IRS employees across the country. . . . The
Commission also received continuous input from stakeholder
groups and congressional representatives, and conducted
research and surveys to better understand IRS operations and
gauge the American public's view of the IRS. Finally, the
Commission reviewed thousands of reports and documents on IRS
operations, management, governance, and oversight.\8\
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\8\ National Commission on Restructuring the IRS. ``A Vision for a
New IRS.'' June 25, 1997. Available from: https://
cybercemetery.unt.edu/archive/natcommirs/20160104232208/http://
www.house.gov/natcommirs/object.htm.
The resulting legislation based in part on this report also
involved numerous hearings and markups by multiple Committees and
Subcommittees, resulting in a 184-page final bill which, in turn,
helped to guide innumerable revisions to strategic plans, Internal
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Revenue Bulletins, and Internal Revenue Manual procedures.
By contrast, title I, part 3 of the Inflation Reduction Act
contained all of nine paragraphs outlining $79.6 billion in tax
administration-related funding Just three of those nine paragraphs
explain how $78.9 billion (99 percent) of the total should be spent.
Some would argue that the IRS funding in the Inflation Reduction
Act was never intended to be as transformational as RRA 98. Perhaps
this was initially the case, given the brevity of instructions Congress
provided about the resource infusion. As we note below, the IRA,
utilizing the reconciliation process, seemed much more focused on
``hitting a number'' to achieve a desirable 10-year budget score than
transforming the IRS.
Whatever the intentions during legislative negotiations, it is now
abundantly clear that advocates of the IRA are describing the new money
in sweeping terms. In transmitting the IRA Strategic Operating Plan to
Secretary Yellen, Commissioner Werfel himself wrote that ``the contents
of this plan provide a vision for the future of Federal tax
administration.'' The Plan itself grandly notes that the IRA funding is
``a historic opportunity to transform the administration of the tax
system and the services provided to taxpayers.''
Plenty of discussions continue to take place in the policy world
over the proper level of IRS funding as well as the best mix between
taxpayer service, compliance initiatives, business systems, and other
items.
Regardless of how those discussions land, NTU offers this reminder:
never before has the IRS--or, to our recollection, any existing Federal
agency--received such a large boost of funding in percentage terms with
so little planning, safeguards, or prospects of outside managerial
oversight. It is now well past time for every member of Congress to
recognize this fact and act accordingly.
managerial reality: compliance is the goal, not ``enforcement''
The word ``enforcement'' has become a common yet unfortunate
shorthand in Washington for the goal of obtaining better compliance
with the tax laws. The choice of words matters, because it predefines
the direction of a conversation that ought to pursue many paths to a
desirable destination. ``Enforcement'' should never be an end in
itself, or a performance metric to justify budgets. Otherwise,
policymakers will simply focus on increasing audit rates, math error
notices, criminal convictions, and other tactics without being held
accountable for a measurement that is actually meaningful: compliance
with tax laws that is less difficult, less expensive, and more
sustainable than it is today.
This definition should have currency even for those who believe
that the ``investment'' of taxpayer dollars into ``enforcement'' was
the primary reason for title I, part 3 of the IRA. The less money the
IRS spends--and the more methods employed beyond traditional
``enforcement''--to obtain compliance, the better the fiscal result
will be.
But the language of the IRA itself points to the problem of
distinguishing ends and means elucidated above. Title I, part 3 is
helpfully entitled, ``Funding the Internal Revenue Service and
Improving Taxpayer Compliance.'' After that point, the minimal
descriptions of where the funding shall be directed fail to capture how
compliance is a multifaceted issue. For example, the relatively small
amount for ``taxpayer services'' describes ``pre-filing assistance and
education'' along with ``taxpayer advocacy services'' as allowable
expenses under the section. The following section, with a very large
amount for ``enforcement,'' describes ``activities . . . to determine
and collect owed taxes'' as well as ``legal and litigation support.''
This categorization fails to appreciate the interrelatedness of
``taxpayer services'' and ``enforcement'' to compliance. From Earned
Income Credit claimants all the way up to Form 1120 filers reporting
Controlled Foreign Corporation activities, ``pre-
filing assistance and education'' can forestall numerous situations
that could result in noncompliance. Both the ``legal and litigation
support'' and ``activities to determine and collect owed taxes'' could
easily lead taxpayers to lean more heavily on ``taxpayer advocacy
services.'' In other words, improved taxpayer services can go a long
way to improve compliance with our tax laws, yet certain enforcement
activities can further increase demands for taxpayer services.
National Taxpayer Advocate Erin Collins put it best when she
observed:
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.\9\
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\9\ Waggoner, Martha. ``Taxpayer services should get more of that
$80 billion, advocate says.'' Journal of Accountancy. March 17, 2023.
https://www.journalofaccountancy.com/news/2023/mar/taxpayer-services-
get-more-80-billion-advocate-says.html#::text=%22The%20most%20
efficient%20way%20to,time%20on%20the%20back%20end.%22.
The division of funding also illustrates how the funding gap
between ``taxpayer services'' ($3.18 billion) and ``enforcement''
($45.6 billion) is even worse than it appears. High-profile IRS actions
since passage of IRA funding in the area of services have primarily
focused on ``front-end'' matters such as hiring more telephone
operators and addressing return processing backlogs. What will be left
for pre-filing education and taxpayer advocacy services after these
flashier improvements have been fully funded? As the next section
explains, the financial reckoning is approaching quickly.
fiscal reality: irs burn rates on customer service and modernization
should be concerning--especially for ``enforcement''
While policymakers, reporters, and other stakeholders have devoted
much attention to the supplemental IRS ``enforcement'' funding included
in the IRA, NTU has also been closely tracking the agency's use of
supplemental customer service and modernization funding. There is a
bipartisan interest in ensuring that the IRS both improves the taxpayer
experience and upgrades severely outdated information technology
infrastructure.
In its IRA Strategic Operating Plan released in April, the IRS
estimated that it would obligate around $1.65 billion of its
supplemental Taxpayer Services funding by September 30, 2024.\10\ This
means that more than half (52 percent) of the agency's allocation for
enhanced Taxpayer Services activities will have been obligated in the
first 3 fiscal years of the 10-year allocation.\11\ Similarly, the IRS
projects it will have obligated nearly 35 percent ($1.66 billion out of
$4.75 billion) by September 30, 2024, just 3 years into the 10-year
allocation.\12\
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\10\ IRS. (April 2023). ``Internal Revenue Service Inflation
Reduction Act Strategic Operating Plan: FY 2023-2031.'' Retrieved from:
https://www.irs.gov/pub/irs-pdf/p3744.pdf (accessed May 11, 2023).
\11\ The first of 10 fiscal years, FY 2022, was also a noticeably
short period for the IRS to obligate funding in the IRA. President
Biden signed the Inflation Reduction Act into law on August 16, 2022,
and FY 2022 ended just 6 weeks later, on September 30, 2022.
\12\ Internal Revenue Service, supra note 10.
By comparison, the IRS will have only obligated 13.6 percent of its
supplemental Operations Support funding ($3.46 billion out of $25.33
billion) and 3.9 percent of its supplemental Enforcement funding ($1.78
billion out of $45.64 billion) by the end of FY 2024.\13\
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\13\ Ibid.
The IRS has many ambitious goals and initiatives in its Strategic
Operating Plan focused on customer service and modernization. Its very
first objective is to ``[d]ramatically improve services to help
taxpayers meet their obligations and receive the tax incentives for
which they are eligible,'' and its second objective is to ``[q]uickly
resolve taxpayer issues when they arise.''\14\
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\14\ Ibid.
The agency outlines 12 initiatives under its first objective,
including such important efforts as ``be[ing] able to file all
documents securely and exchange correspondence electronically'' and
providing ``greater upfront clarity and certainty additional guidance
on tax issues.''\15\ The IRS outlines seven initiatives under the
second objective, including ``provid[ing] taxpayers with timely and
tailored post-filing treatments to resolve issues and omissions on
their tax returns'' and ``send[ing] taxpayers notices they can
understand, delivered in ways they prefer, with clear explanations of
issues and steps to resolution.''\16\
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\15\ Ibid.
\16\ Ibid.
NTU agrees with many of these initiatives and would like to see the
IRS succeed. Indeed, success could result in a vastly improved taxpayer
experience with the IRS, the central goal of the bipartisan, recently
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enacted Taxpayer First Act of 2019.
But as explained in the previous section, even those who support an
``enforcement''-heavy approach to IRS budgets should be concerned about
the agency's projected burn rate for supplemental Customer Service and
Modernization funding. After all, the Strategic Operating Plan for the
IRS acknowledges that ``all our efforts as outlined in this plan--
including in the areas of customer service, issue resolution, and
effective enforcement--will increase overall tax compliance.''\17\
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\17\ Ibid., p. 8.
The objectives and initiatives above are ambitious and
transformational. Many of them are also expensive. NTU encourages the
committee to engage with Commissioner Werfel and senior IRS officials
to determine whether these initiatives will require Customer Service
funding beyond levels provided by Congress, and how the IRS plans to
square its forward-looking initiatives with the need to hire and retain
the additional customer service representatives that made this most
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recent tax filing season less disruptive than COVID-era filing seasons.
Now might be an opportune time for lawmakers to consider
reallocating a portion of IRA funding away from the more flush
Enforcement and Operations Support accounts and towards Customer
Service and Business Systems Modernization. The National Taxpayer
Advocate, Erin Collins, recently called for just that sort of
reallocation in a March blog post on the Taxpayer Advocate Service's
website:
My office doesn't have the financial expertise to determine the
costs associated with each initiative. But at a high level, two
things are clear: (1) the IRS needs substantially more funding
than it was receiving in annual appropriations bills to better
serve U.S. taxpayers, and (2) the additional funding provided
by the IRA, while appreciated and welcomed, is
disproportionately allocated for enforcement activities and
should be reallocated to achieve a better balance with taxpayer
service needs and IT modernization. We need to put taxpayers
first.\18\
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\18\ Collins, Erin. ``NTA Blog: National Taxpayer Advocate Urges
Congress to Maintain IRS Appropriations but Re-Direct Some Funds Toward
Taxpayer Service and Information Technology Modernization.'' March 16,
2023. https://www.taxpayeradvocate.irs.gov/news/nta-blog-nta-urges-
congress-to-maintain-irs-appropriations-but-re-direct-some-funds-
toward-taxpayer-service-and-it-modernization/ (accessed May 11, 2023).
Tax practitioners have offered a similar recommendation of late.
The American Institute of Certified Public Accountants (AICPA) recently
recommended that the Treasury Department and IRS address
``imbalance[s]'' between the enforcement account and taxpayer services
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account:
. . . [G]iven the historic low levels of IRS taxpayer services,
we are concerned that there was an insufficient allocation of
funding in the IRA to improve taxpayer services to appropriate
levels. We are concerned that service challenges will persist
unless sufficient, targeted funding for technology
improvements, human talent and training, and taxpayer services
are appropriated.\19\
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\19\ AICPA. (March 28, 2023). ``Re: IRS Operational Plan for
Resources Included in the Inflation Reduction Act of 2022.'' https://
aboutblaw.com/7i7.
These stakeholders are not partisan, and they are certainly not
invested in seeing the IRS funding provided in the IRA fail. That
should underscore for members of this committee that there is a
compelling, non-ideological case to consider diverting a portion of IRA
funds away from well-funded accounts and towards critical activities
that would improve taxpayer services.
fiscal reality: pinpointing the impact of ira's ``enforcement'' funding,
or changes to that funding, misses the point of irs transformation
Since the stated topic of this hearing is ``House Republican
Supplemental IRS Funding Cuts: Analyzing the Impact on Federal Law
Enforcement and the Federal Deficit,'' I will turn to the latter topic.
As you know, the nonpartisan Congressional Budget Office (CBO)
estimated in August 2022 that the $80 billion in enhanced IRS resources
included in the IRA would increase Federal revenues by $203.7 billion
(on a non-scorable basis, due to CBO scoring conventions) from Fiscal
Years 2022 through 2031.\20\ If one were to count those estimated
revenues as contributing to deficit reduction, as many supporters of
the IRA have, the net deficit reduction projected from the IRS
provisions over the same 10-year period was $123.7 billion.
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\20\ Congressional Budget Office (CBO). (August 5,
2022).``Estimated Budgetary Effects of H.R. 5376, the Inflation
Reduction Act of 2022.'' Retrieved from: https://www.cbo.gov/system/
files/2022-08/hr5376_IR_Act_8-3-22.pdf (accessed May 11, 2023).
A month later, CBO revised down the non-scorable revenue increases
from FYs 2022 through 2031, from $203.7 billion to $180.4 billion.
Making the same assumptions as above, the net deficit reduction from
IRS provisions was revised down to $100.4 billion over 10 years.\21\
Subsequent legislation from House Republicans to repeal significant
portions of the IRA's IRS funding--including all supplemental amounts
for enforcement and operations support--were scored as increasing
deficits by $114.4 billion from FYs 2023 through 2032 \22\ and $119.7
billion from FYs 2023 through 2033.\23\
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\21\ CBO. (September 7, 2022). ``Estimated Budgetary Effects of
Public Law 117-169.'' Retrieved from: https://www.cbo.gov/system/files/
2022-09/PL117-169_9-7-22.pdf (accessed May 11, 2023).
\22\ CBO. (January 9, 2023).``Estimated Budgetary Effects of H.R.
23, the Family and Small Business Taxpayer Protection Act, as Posted on
the Website of the Clerk of the House of Representatives on January 9,
2023, as an Item That May Be Considered Pursuant to a Rule.'' Retrieved
from: https://www.cbo.gov/system/files/2023-01/hr23_IRS.pdf (accessed
May 11, 2023).
\23\ CBO. (April 25, 2023). ``Re: CBO's Estimate of the Budgetary
Effects of H.R. 2811, the Limit, Save, Grow Act of 2023.'' Retrieved
from: https://www.cbo.gov/system/files/2023-04/59102-Arrington-
Letter_LSG%20Act_4-25-2023.pdf (accessed May 11, 2023).
NTU Foundation vice president of research Demian Brady previously
reviewed the numerous reasons why increased revenue collections by the
IRS under the IRA's supplemental funding may fall short of CBO's
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expectations:
``. . . [T]he final version of the IRA dropped a provision
granting the IRS expedited hiring authority. In the absence of
that authority, it will take longer to onboard and train new
employees, reducing the level of expected collections.
``As inflation leads to higher cost-of-living adjustments
for Federal workforces, the IRS may not be able to hire as many
people with the funding provided (though the number of
additional FTEs would still be much larger than mainstream
media estimates). This would further undermine revenue
estimates.''
``Challenging the IRS can be costly and drag on for an
extended period of time, but the agency is by no means always
successful in securing judgments against those it accuses of
fraud. NTUF previously compiled a list of news articles where
the IRS had taken an overaggressive position against taxpayers
and ultimately lost in court.''\24\
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\24\ Brady, Demian. ``What the IRS's New Enforcement Budget Means
for Taxpayers.'' NTU Foundation, September 21, 2022. Retrieved from:
https://www.ntu.org/foundation/detail/what-the-irss-new-enforcement-
budget-means-for-taxpayers (accessed May 11, 2023).
Each of those concerns remain relevant to the agency and to CBO's
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estimates today.
NTU and NTU Foundation were even more skeptical of the revenue
estimates offered by the Treasury Department in 2021, in the lead-up to
consideration of the Build Back Better Act and the IRA. In September
2021, then-Acting Assistant Secretary for Tax Policy Mark Mazur wrote
that:
Conservatively, about $400 billion of additional revenue can be
collected (incorporating both the direct and indirect effects
of enforcement investment) from the President's proposals, net
of the $80 billion investment.\25\
\25\ Mazur, Mark J. ``The Revenue Impacts of Compliance
Proposals.'' Department of the Treasury Office of Tax Policy. September
14, 2021. Retrieved from: https://home.treasury.gov/system/files/136/
Yellen_Neal_Congressional_Budget.pdf (accessed May 11, 2023).
The nonpartisan scorekeepers at CBO clearly disagreed with this
assessment--and in fact ultimately estimated revenue effects about a
fourth the size of the Treasury Department's 2021 estimates--but the
IRS insisted as recently as April 2023, upon the publication of its
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Strategic Operating Plan, that (emphasis ours):
The Congressional Budget Office estimates that the additional
$80 billion provided to the IRS by the IRA will increase
Federal revenue by more than $180 billion in the decade ahead,
considering only direct enforcement revenue based on additional
staffing.\26\
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\26\ IRS. (April 2023). ``Internal Revenue Service Inflation
Reduction Act Strategic Operating Plan: FY 2023-2031.'' Retrieved from:
https://www.irs.gov/pub/irs-pdf/p3744.pdf (accessed May 11, 2023).
We remain skeptical that the IRS will spend IRA resources in an
efficient and effective enough manner to reach the revenue estimates
established by CBO. In addition to the concerns outlined above, the IRS
is already reporting to stakeholders that it is stretched thin on
resources to implement the clean energy provisions included in the IRA.
The Strategic Operating Plan suggests that some of the supplemental
resources available to the IRS under the IRA will need to be diverted
to implementation of IRA clean energy provisions.\27\ Might this cut
into the additional revenues CBO previously projected the IRS could
collect through increasing enforcement activities? Time will tell, but
lawmakers should monitor IRS implementation of the funding closely to
see if net deficit reduction is occurring at rates projected by CBO or
the Treasury Department.
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\27\ Ibid; see the table on page 129, which indicates the agency
proposed to invest $3.9 billion on implementing ``Energy security''
provisions of the IRA rather than $0.5 billion Congress specifically
earmarked for such provisions.
None of these concerns should be taken to mean we doubt the premise
that better tax compliance can enhance Federal revenue. Rather, NTU
simply returns to our earlier, cautionary advice in this testimony that
it is a mistake to engage in transformational compliance initiatives
simply to reach a particular ``offset'' for government spending in one
piece of legislation.\28\ The revenue collection number from IRA
funding for compliance (or even the clumsy misnomer ``enforcement'')
is, on net, likely to be quite a bit more than zero.
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\28\ As an example, certain additional revenues expected from the
Foreign Account Tax Compliance Act (FATCA) have not materialized as
expected, for a number of reasons. ``When FATCA was implemented, it was
estimated to bring in $8.7 billion in revenue over the next 10 years.
Although total revenues tied to the legislation are unclear, the IRS
has collected less than $14 million over the last 12 years.'' See
https://brighttax.com/blog/fatca-update-april-2022.
There are other fundamental matters to consider at today's hearing,
in addition to whether the actual net deficit result will be $100.4
billion, or $50.2 billion, or something else. What types of metrics for
example, besides, revenues, will be used to track enforcement
activities? In the 1980s and 1990s, Congress acted to make certain that
performance and promotion evaluations for individual IRS employees were
not based on collection quotas.\29\
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\29\ See, for example, Parker, John. ``IRS Officers Pressured to
Make Seizures, Ex-Chief Says.'' Daily Oklahoman. August 19, 1998.
https://www.oklahoman.com/story/news/1998/08/19/irs-officers-pressured-
to-make-seizures-ex-chief-says/62271734007/. And, Associated Press.
``IRS Suffers `Seizure Fever,' Agents Tell Subcommittee.'' Los Angeles
Times. June 23, 1987. https://www.latimes.com/archives/la-xpm-1987-06-
23-fi-10105-story.html.
The IRS Strategic Operating Plan outlines a number of activities
that will take compliance in partially or entirely new directions,
which could easily impact the CBO estimates described earlier in
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unpredictable ways. These include:
``Develop a process for continually refining compliance
analytics models based on feedback and new information'' for
audits. Robust models could prevent wasted resources, but
flawed or biased ones could just as easily lead the Service
down costly rabbit holes.
``Develop and implement a plan to improve the IRS
Whistleblower Program.'' NTU is a longtime supporter of the IRS
Whistleblower Program, and whistleblower protection laws
throughout the Federal Government. In fact, the focused
information and ``leads'' from this program could prove more
effective for compliance and audits than hit-and-miss data
dragnets that require costly resources and end up targeting
innocent taxpayers. Depending on how and when this program
upgrade is prioritized, however, key opportunities for revenue
recovery could be missed.
``Develop approaches and new treatments for large
partnership enforcement by leveraging data and analytics.'' A
Treasury Inspector for Tax Administration (TIGTA) report from
last year reported that the ``no-change'' in partnership audits
ranged from 78 to 90 percent.\30\ How much the IRS's new
``approaches'' affect that rate could mean billions of revenue
dollars either way. We would hasten to add that many of the
energy provisions in the IRA would allow for the ``sale'' of
tax credits from taxpayers who could not fully utilize them to
others. These transactions would likely involve the very
partnerships that many IRA supporters seem to view with
suspicion. The political pressure on the IRS's partnership
audit goal could thus be acute, and diminish possible revenue
collections.
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\30\ Bonner, Paul. ``BBA Partnership Audits Show High No-Change
Rates, TIGTA Says.'' Journal of Accountancy, March 28, 2022. https://
www.journalofaccountancy.com/news/2022/mar/bba-partnership-audits-show-
high-no-change-rate-tigta-says.html.
The greatest uncertainty in revenue estimates, however, is the
basis on which they are projected: the ``tax gap'' itself. Other
witnesses will be providing greater detail than NTU's testimony on this
issue; our work suggests that while the tax gap is considerable,
measuring its size depends not only on taxpayer behavior, but also
shifts in the economy, and of course, interpretations of how laws
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actually apply.
The historic fluctuations in official estimates of the tax gap are
an illustration of the volatile nature of the issue. Earlier this year
Joe Bishop-Henchman, a colleague at our sister organization National
Taxpayers Union Foundation, wrote:
The IRS released its latest estimates of the tax gap in 2022.
The IRS found that the annual gross tax gap for 2014-2016 was
$496 billion. After late payments and enforcement actions, the
net tax gap was $428 billion. That figure represented 2.7
percent of GDP, the same as estimates for other recent years,
and down from 3.3 percent in 2001 and 3.4 percent in 2006. The
IRS estimates that the gap in 2017-2019 dipped to 2.6 percent
of GDP.
International studies show that the United States has a fairly
low tax gap compared to other countries. In a 2018 study,
Polish economists Konrad Raczkowski and Bogdan Mroz estimated
tax gaps for 35 countries, including 28 EU countries and the
United States. They put the U.S. gap at 3.8 percent of GDP and
the EU gap at 7.7 percent of GDP. . . . In a 2019 study,
political economist Richard Murphy estimated that the tax gap
for 28 EU countries was equivalent to 5.6 percent of GDP. The
latest IRS study puts the U.S. Federal tax gap at 2.7 percent,
but with an estimated state-local tax gap added, the U.S. total
tax gap would be about 4.2 percent of GDP.\31\
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\31\ Bishop-Henchman, Joseph. ``Transforming the Internal Revenue
Service.'' Cato Institute Policy Analysis No. 942. April 11, 2023, pp.
9-11. https://www.cato.org/policy-analysis/transforming-internal-
revenue-service.
But what of the as-yet-indeterminate components of the tax gap,
such as digital assets, that are not fully incorporated into
conventional estimation methodologies? A National Taxpayers Union
Foundation analysis from 2021 illuminated some of the obstacles to
reaching a firm calculation, at a time when then-Commissioner Rettig
ventured the total tax gap ``could approach and possibly even exceed''
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$1 trillion:
A rough IRS estimate in 2018 placed the tax gap from
cryptocurrency at about $11.5 billion, back when the digital
cryptocurrency market was worth an estimated $500 billion.
Even assuming the IRS has failed to improve at all on its
previously estimated noncompliance rate of 50 percent, this
extrapolates to a cryptocurrency tax gap of just under $50
billion based on the 400 percent increase in global market
capitalization that digital currencies have enjoyed since then.
That is of course a significant amount, but it is also only
around 12 percent of the $381 billion tax gap estimate.
The IRS also has not made a concrete estimate of offshore
holdings which are going untaxed. Research the IRS helped fund
and authored in part by left-wing economist Gabriel Zucman
placed the amount of American offshore holdings in low-tax
jurisdictions at just over $1 trillion. They arrive at this
number by assuming that 95 percent of wealth in these holdings
is concealed from the IRS, an estimate which is likely
high.\32\
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\32\ This is especially the case since the passage of the
Infrastructure Investment and Jobs Act, after the National Taxpayers
Union Foundation analysis was published. The law extends the $10,000-
plus cash transaction reporting requirement businesses to digital
assets, giving the IRS a new stream of data to examine for possible tax
evasion. New estimates of revenues from this area of tax compliance
will need to be adjusted to reflect efforts already underway.
Nevertheless, even if one assumes this data is entirely
correct, the authors still estimate just $15 billion in
uncollected tax revenue per year. Combining this number with
the estimate of roughly $50 billion in uncollected
cryptocurrency tax revenue, we are still shy of $500 billion,
let alone $1 trillion.\33\
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\33\ Wilford, Andrew, Moylan, Andrew, and Sepp, Pete. ``The Tax
Gap: No Trillion-Dollar Silver Bullet.'' National Taxpayers Union
Foundation. May 13, 2021. https://www.ntu.org/foundation/detail/the-
tax-gap-no-trillion-dollar-silver-bullet. Note former National Taxpayer
Advocate Nina Olson's observation:
Equating the entire tax gap to ``tax evasion'' is just so
disingenuous. And it's also wrong; it's incorrect. Evasion has a
technical meaning under the law, and generally it requires mens rea, a
criminal intent. So much of it is error, or inadvertent . . . there are
a bunch of different types of noncompliance. And if you say [it's all
tax evasion]--and that's what The Washington Post called it, that's
what The New York Times called it--then that creates distrust among the
taxpayers of the tax agencies. [They're asking], ``why am I paying if
you're letting all these people off the hook?''
NTU does not contend that complete repeal of IRA's ``enforcement''
portion of IRS funding will have zero deficit impact, relative to the
current budget baseline of which IRA is now a part. Nor, however,
should IRA's supporters contend that shifting ``enforcement'' funding
into other IRS functions has a simple linear upward impact on future
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deficits.
Nor should serious policy advocates on either ``side'' of the IRA
ignore the net revenue impacts of IRS funding decisions. One factor in
this equation is whether increased compliance burdens on all taxpayers
in an income class to ferret out just the noncompliant taxpayers,
diverts resources from legitimate, profitable activities that might
otherwise be taxed. We leave the detailed analysis of that matter to
another witness on this panel, Chris Edwards, but we acknowledge its
importance.
In sum, precisely because the IRS would engage in brand-new
compliance strategies, precisely because measurements of the tax gap
and the hidden economy are fluid, and precisely because other options
like improved customer service to enhance compliance have not been
adequately explored, the deficit impact of IRA changes cannot easily be
measured to the nearest $10 billion, or likely even to the nearest $100
billion.
It is also why tying this exercise to tax and spending legislation
passed through the reconciliation process, is a far from helpful way to
discuss the fiscal consequences of the transformation now occurring at
the IRS. Defining the success of this transformation, and then making
that success a priority, will yield enhanced revenue in the future.
Arguing now over what exactly that revenue will be over a fixed period
of time will, ironically, distract policymakers' attention from the
very tasks needed to see those revenues come to fruition in the first
place.
policy reality: even if the ``$400,000 pledge'' is kept, all taxpayers
will be affected by ira compliance funds
A byproduct of the policy debate over IRA has been a fixation on
Secretary Yellen's directive (reiterated by Commissioner Werfel) ``not
to increase audit rates relative to historical levels for small
businesses and households earning $400,000 per year or less.'' No less
than half a dozen Questions for the Record submitted during
Commissioner Werfel's confirmation hearing before this committee
contained variations on that theme.\34\
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\34\ United States Senate Committee on Finance. ``Finance Committee
Questions for the Record, Hearing on the Nomination of Daniel Werfel,
Responses by Daniel Werfel.'' February 24, 2023. https://
www.finance.senate.gov/download/responses-to-questions-for-the-record-
to-daniel-werfel.
As my colleagues and I have written before, the $400,000 threshold
is, in itself, subject to all manner of interpretation, besides the
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obvious question of how to define ``historical rate'':
Does that amount represent adjusted gross income, modified
adjusted gross income, taxable income, total positive income,
or some other measure? Is it what a taxpayer reports on their
return for the year the IRS wishes to conduct an examination,
or is it what the IRS believes the taxpayer's taxable income
ought to be after proposed adjustments? If the latter, greater
numbers of Americans than advertised will be subject to
scrutiny, perhaps to no avail.
Does this directive create a ``marriage penalty,'' in the
sense that the IRS could investigate a single taxpayer's return
reporting above $400,000, but could also look into a joint
return where each taxpayer earns $200,000? Dual-earner
households in large cities could be surprised to find
themselves under the microscope.
What year will govern the audit decision--the year of the
return under examination, or the taxpayer's present
circumstances? A business owner who earned $500,000 during the
good times of 2019 might be shocked to get an audit notice next
year if she finds herself struggling with half that cash flow
today. In fact, high-income tax returns are also among the most
volatile in reporting year over year incomes.
What happens if the directive is disobeyed or
unintentionally violated? The Secretary's ability to impound
funds is highly limited. And if ``accidents'' happen, how can a
taxpayer possibly be made whole? A Treasury directive does not
carry the force of law in court, and regardless, no outside
entity will be monitoring IRS audit rates in real time.\35\
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\35\ For more detail, see Brady, Demian. ``What the IRS's New
Enforcement Budget Means for Taxpayers.'' National Taxpayers Union
Foundation. September 21, 2022. Retrieved from: https://www.ntu.org/
foundation/detail/what-the-irss-new-enforcement-budget-means-for-
taxpayers.
Do these concerns amount to parsing words? Perhaps, but the
operation of the entire tax system often depends upon this very
exercise, as Congress proves with myriad technical corrections to
various tax laws, or with numerous controversies that wind up in the
courts. Only very recently have clues begun to emerge on how exactly
the IRS will keep this ``pledge,'' but the definition has yet to be
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settled.
Of greater importance, the IRS's own Strategic Operating Plan makes
no secret that several compliance and enforcement efforts that have
little to do with audits will apply to all taxpayers:
``Expand capacity and resources for our non-filer and
return-delinquency programs.''
``Create processes for real-time identification of taxpayers
who miss payments . . .''
``Develop and pilot new collection treatments based on data
and analytics.''
``Centralize compliance analytics and develop a process to
regularly model the population of tax returns.''\36\
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\36\ IRS. (April 2023).``Internal Revenue Service Inflation
Reduction Act Strategic Operating Plan: FY 2023-2031,'' pp. 56, 58, 60,
and 66. Retrieved from: https://www.irs.gov/pub/irs-pdf/p3744.pdf
(accessed May 11, 2023).
These projects are couched in terms of providing better service to
taxpayers; and as for regular modeling of the tax return population,
this is undoubtedly preferable to plowing ahead with compliance
initiatives based on a poor understanding of the filing population.
Nonetheless, they demonstrate that even if a strict $400,000 per-filing
unit threshold, based on taxable income for the year audited, is
faithfully adhered to, other types of ``enforcement'' and compliance
projects from IRA funding will affect middle-class and moderate-income
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taxpayers.
There are also practical considerations that will soon become
evident. Suppose, for instance, IRS counsel are pursuing two cases in
Tax Court with virtually identical facts and circumstances, thereby
utilizing the same legal strategies in both actions. In the first
action, the Service prevails against a taxpayer with an income (however
measured) of $415,000. The second action, yet to be decided, involves a
taxpayer with an income of $385,000. It is foolish to assume that the
Service would suddenly drop the second case and walk away because of
some fluid income threshold that doesn't even have a definition in
statute.
In addition, even the most precise analytics and data collection in
the area of tax compliance are likely to yield ``false positives''--
potential audit selections that fall at or under the $400,000 threshold
for some reason. Indeed, some situations may require innovative and
advanced modeling for a particular behavior (e.g., concealing digital
assets) regardless of income, and then identifying on purpose those who
exceed the $400,000 threshold for possible audit. What happens to the
``accidental'' or ``incidental'' data collected from this exercise for
households who fall under the threshold? Will a handful of taxpayers at
the $390,000 threshold be allowed to skate away from an audit? What if
a million taxpayers making less than $100,000 are suspected of
concealment? Will this portion of the data simply be destroyed, or used
in some other non-audit compliance manner?
Historically, it is also true that IRS tactics honed for use
against one class of taxpayers are soon deployed against others.
Information Document Requests (IDRs), once primarily a feature of
large-business audits, are now commonplace in examinations involving
firms with dozens rather than thousands of employees. In the mid-2010s,
the use of designated summons power and designating cases for
litigation in the examination and investigation process had become so
widespread as to attract the attention of Congress and prompt limited
reforms in the Taxpayer First Act.\37\
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\37\ See, for example, Sepp, Pete. ``Statement Prepared for the
Subcommittee on Economic Growth, Tax, and Capital Access, Committee on
Small Business, United States House of Representatives, Regarding the
Subcommittee's Hearing on `Audits and Attitudes: Is the IRS Helping or
Hurting Small Businesses?' '' Submitted June 22, 2016. https://
www.ntu.org/publications/detail/statement-ofpete-sepp-to-house-
subcommittee-regarding-irs-small-business-reforms. Here we also note
the analyses that many small businesses undergo when evaluating whether
to challenge what they believe to be an erroneous IRS assessment,
leading many to pay the tax owing to the costs of appeal or litigation.
Today, given statistics of average disputed amounts of tax on small
business returns (see IRS Data Book for FY 2022, https://www.irs.gov/
statistics/soi-tax-stats-irs-data-book), even some in income categories
of $500,000 up to $1 million might make a similar judgment.
Finally, the simple fact is that money is fungible. As Demian Brady
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of National Taxpayers Union Foundation explained:
Nothing the IRS receives in annual appropriations, over and
above the IRA funds, would be subject to the $400,000 taxpayer
income limitation. The Service could also simply request from
Congress, or to a more limited degree, redirect, more funds
from what it would otherwise normally spend on high-income
enforcement activities toward those lower on the scale.
Furthermore, neither Secretary Yellen nor Congress demanded
that any kind of public accounting be kept on how enforcement
dollars will be used against certain types and classes of
taxpayers. Additional monies in the IRA to the Treasury
Inspector General for Tax Administration could be employed for
such purposes, but here again, the legislation is silent on
where TIGTA is supposed to look.\38\
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\38\ Brady, Demian. ``What the IRS's New Enforcement Budget Means
for Taxpayers.'' National Taxpayers Union Foundation. September 21,
2022. Retrieved from: https://www.ntu.org/foundation/detail/what-the-
irss-new-enforcement-budget-means-for-taxpayers.
Congress could rectify this issue by following up with a demand for
such a detailed accounting of high-income ``enforcement'' expenditures,
but another form of reconciliation is necessary too: that IRA
compliance funding will touch the entire taxpaying population, even if
one enforcement tool is aimed at higher-income filers. Once this
reality is accepted, the need for a holistic, systemic approach to
compliance that respects all taxpayers' rights, regardless of their
circumstances, will become apparent.
recommendations: balancing compliance, fiscal responsibility,
and taxpayer rights
If the IRS is to deliver what the Commissioner calls ``the
modernized tax administration system the American people deserve,''
that achievement will not be solely because of the IRS's efforts. It
will take a number of major commitments throughout government and the
private sector to effectuate. The following are some of NTU's top
priorities for members of the committee to consider. Some require
direct congressional action, while others will benefit simply from your
leadership and support.
(1) deploy existing assets for management, including the irs oversight
board
We begin our list with this item for a reason. Congress cannot, on
its own, effectively oversee the IRS's strategic plan without
institutions that are dedicated to monitoring and making course
corrections to the Service's strategies and tactics on a consistent
basis.
No other entity is better suited to this task than the IRS
Oversight Board. Created in the IRS Restructuring and Reform Act of
1998 with the purpose of bringing in outside experts to oversee the
``administration, management, conduct, direction, and supervision'' of
IRS operations. It was specifically tasked with reviewing and approving
the annual and long-range strategic plans of the IRS, including its
mission and objectives. It can do so for 2023's Strategic Operating
Plan,
The Board is supposed to have nine members, including the Treasury
Secretary and the IRS Commissioner as standing members along with seven
positions appointed by the President and nominated by the Senate. One
of the appointees must be either a Federal employee or a representative
of IRS employees, but otherwise, as noted, the intention of the 1998
Act was to bring people with private sector experience into discussions
regarding the agency's operational challenges. Such experience need not
be focused on managerial issues like IT or personnel. Private-sector
Board members could bring valuable perspectives on how to measure the
tax gap, where taxpayer and customer behavior patterns overlap, and how
arbitration and mediation can resolve disputes.
Even though appropriations for the IRS (as well as IRA) continue to
include language providing support funding for the Board, it has
unfortunately gone dormant since 2015 due to a lack of a quorum. That
problem can be rectified almost immediately, by encouraging the
President to send Board nominees to the Senate for quick confirmation.
Reviving the Board won't be easy, but it is the first big test of
whether policymakers are serious about making the Strategic Operating
Plan work. Given that there was so little legislative collaboration on
IRA versus RRA 98, it is more imperative now than it was 35 years ago.
This committee can create a safe space for doing so, by reaching out to
and encouraging the White House to send nominees for the Board to
consider as soon as possible.
At the same time, it is also apparent that little consultation with
the IRS Advisory Council (IRSAC) and the Electronic Tax Administration
Advisory Council (ETAAC) took place prior to production of the
Strategic Operating Plan.\39\ This needs to change. IRSAC and ETAAC
could focus on rectifying specific issues raised by the IRS Oversight
Board, relying on their experience as practitioners and experts on many
aspects of tax administration.
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\39\ One member of IRSAC recently told me that the Council received
little more than a private briefing just prior to the release of the
plan. The Finance Committee could, and in our opinion should, ask IRS
management for an explanation of the lack of consultation with IRSAC
and ETAAC.
Leveraging the underappreciated Taxpayer First Act Report of 2021
likewise falls under this category. The Strategic Operating Plan would
appear to contain an impressive level of detail in its 150 pages, but
beyond the graphics, the generous font for text, and the ``Key
Projects'' and ``Milestones'' sections is a fair amount of repetition
and vagueness in how the ``Operating'' part of the plan would actually
work. The Taxpayer First Report, spanning 254 pages, gives many
detailed insights into how taxpayer service, personnel training, and
organizational restructuring could modernize the IRS. These include how
divisions of the Service can be reorganized to improve the taxpayer
experience, how outreach to underserved taxpayer communities can be
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improved, and how risks to managerial failure can be mitigated.
While NTU does not agree with every approach in the report, the
stakeholder outreach process, detailed in the report's appendices, is a
good starting point for the kind of collaboration the IRS, in
conjunction with Congress, the Oversight Board, IRSAC, ETAAC, and other
stakeholders must follow going forward.
We would not wish to neglect mentioning the need to speedily
evaluate another nominee that may soon be coming the committee's way--
IRS Chief Counsel. The committee may of course find this nominee
qualified or unacceptable, but it would be a mistake to simply defer
action of any kind for months on end once the nominee is designated.
Former IRS officials and tax practitioners alike have told us that the
Service's legal team is especially sensitive to leadership from the
top. Again, while the Biden administration may send a poor choice for
Chief Counsel to the committee, it is important for members to act
quickly to reject such a nominee, rather than leave the post unfilled
and the Chief Counsel's office with a weak rudder that could steer
IRS's legal strategy in even less helpful directions for taxpayers.
(2) create ``off-ramps''--a working appeals process, settlement
initiatives, and adr--to protect taxpayers and save government
resources
The Taxpayer First Act of 2019 should have been the final word in a
nearly
century-long line of orders from Congress to provide an independent,
neutral forum for taxpayers and the government to resolve disputes
without going to court. In addition to codifying the IRS Independent
Office of Appeals, the 2019 law also limited the circumstances under
which the Service could use tactics to deny appeal rights. Its language
specifically stated that while the Treasury could provide ``reasonable
exceptions,'' the ability to appeal was to be ``generally available to
all taxpayers'' who were not taking ``frivolous position[s],'' as
defined by 26 U.S.C. Sec. 6702(c).''
In November 2022, the IRS proposed a rulemaking with no fewer than
24 exceptions to appeal rights, including several that were clearly
aimed at legitimate appeals challenging procedural validity of
regulatory or subregulatory guidance. One reason the Service gave for
its limits on appeals was resource constraints. But as NTU noted in
comments filed in response to the rulemaking:
We also believe that additional funding for the Office would be
an acceptable and welcome use of a portion of the $80 billion
in funding Congress has appropriated to the agency for use over
the next 10 years under the Inflation Reduction Act (IRA) of
2022. In fact, additional spending to expand appeals rights and
independent review of tax controversies could ultimately save
the agency money over the long run, by obviating more expensive
and protracted litigation over tax controversies. The agency
could also see indirect savings from improved taxpayer
compliance, should taxpayers have confidence in a more robust
Independent Office of Appeals.\40\
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\40\ Sepp, Pete, and Lautz, Andrew. ``Comments re: 87 FR 55934,
`Resolution of Federal Tax Controversies by the Independent Office of
Appeals.' '' November 14, 2022. https://www.ntu.org/publications/
detail/ntu-offers-comments-to-irs-on-resolution-of-federal-tax-
disputes.
The IRS Strategic Operating Plan would seem to support this funding
direction, by calling to ``[increase] staff in the Independent Office
of Appeals to resolve tax controversies arising from enhanced
compliance efforts.'' Commissioner Werfel himself affirmed that the
appeals process should be a way to properly air facts and circumstances
of individual cases, stating that a ``one-size-fits-all approach would
not be aligned with these rights [to appeal].''\41\
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\41\ United States Senate Committee on Finance. ``Finance Committee
Questions for the Record, Hearing on the Nomination of Daniel Werfel,
Responses by Daniel Werfel.'' February 24, 2023, pp. 22-23. https://
www.finance.senate.gov/download/responses-to-questions-for-the-record-
to-daniel-werfel.
Without additional congressional guidance, however, the IRS's
rulemakings could stand, and appeals could still be a limited channel
for taxpayers to assert their rights. One excellent way to provide that
guidance would be through committee markup and reporting to the floor
of Senator Cornyn's ``Small Business Taxpayer Bill of Rights'' (S.
1177).\42\ This legislation would clarify and strengthen appeal rights
by effectively banning ex parte communications between the Appeals
office and the rest of the IRS, as well as preventing the Appeals
office from raising new issues or theories with taxpayers when meeting
with them.
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\42\ Sepp, Pete and Lautz, Andrew. ``Senate Bill Would Provide
Small Business Taxpayers with New Rights.'' National Taxpayers Union.
May 17, 2021. https://www.ntu.org/publications/detail/senate-bill-
would-provide-small-business-taxpayers-with-new-rights.
Another problem resolution method the Service should embrace more
fully, where facts and circumstances of many taxpayers are indeed in
closer alignment, is the settlement initiative. Pioneered over 40 years
ago under then-IRS Commissioner Roscoe Egger, this concept allows the
IRS to offer limited-time legal settlements to taxpayers in cases with
no litigation hazard and where there are no precedents to be set or
compliance problems in the absence of a trial. Depending on the issue
at hand, a taxpayer might be able to keep a fraction of their deduction
or credit in question, or could be limited only to their ``cash
outlays'' in claiming a tax benefit. In the years that followed,
settlement initiatives were successful in clearing numerous cases from
crowded court dockets on matters such as the amortization of
intangibles, a targeted jobs tax credit, and perhaps most successfully,
in 2008, the lease-in/lease-out and sale-in/lease-out (LILO/SILO)
controversy. Both the government and taxpayers benefited from reduced
time and litigation costs, while the Treasury recovered tens of
billions in revenues that might otherwise have entailed considerable
effort and risk to recover.\43\
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\43\ For excellent background, see Gomez, Armando, and Barral,
Roland. ``It's High Time to Clear Out the Tax Court's Easement
Backlog.'' Tax Notes Federal, Volume 179, April 10, 2023. https://
www.taxnotes.com/exempt-organizations/conservation-easements/its-high-
time-clear-out-tax-courts-easement-backlog/2023/04/25/7g8xx.
Still another promising avenue is alternative dispute resolution
(ADR), through mediation and binding arbitration. Common in tax systems
around the world from the United Kingdom to Portugal to Australia, ADR
allows taxpayers of limited means or time the ability to quickly obtain
results that are fair to all parties. The National Commission on
Restructuring the IRS gave extensive consideration to improving
Alternative Dispute Resolution methods for use in Federal tax
controversies, including mediation as well as binding arbitration.
Limited procedures were in place at that time, applying primarily to
cases of over $10 million or more. ADR at the tax agency was a
relatively new concept, following passage of the government-wide
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Administrative Dispute Resolution Act of 1996.
Ultimately, the Commission did not make major recommendations in
this area, although the subsequent 1998 RRA did remove the dollar
threshold, and establish a pilot program for binding arbitration.
Unfortunately, the usefulness of ADR for most taxpayers has so far been
questionable. The National Taxpayer Advocate's 2016 Annual Report to
Congress has made the IRS's failure to ``effectively use ADR'' as #15
on the ``Most Serious Problems'' list.\44\
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\44\ For background, see, Sepp, Pete. ``Comments before the
Subcommittee on Oversight, Committee on Ways and Means, `IRS Reform:
Resolving Tax Disputes,' '' September 13, 2017. https://www.ntu.org/
publications/detail/irs-reform-resolving-taxpayer-disputes.
With ADR confined largely to the periphery of taxpayer service
offerings by the IRS, the IRA funding infusion could easily stand up a
more robust program. A legislative framework for doing so already
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exists in S. 1177.
Some may object to these ``off ramps'' as essentially ``escape
routes'' for wealthy taxpayers. Aside from the fact that the U.S.
Constitution does not define rights by income levels, all of these
procedures actually inure most to the benefit of those whose legal
resources are limited. Furthermore, they can aid in compliance by
reinforcing public trust that these options for settling disputes are
available to all and provide a ``fair shake'' for all. At the same
time, expanding their availability would optimize revenue collection at
the most efficient level of expenditure for the government, delivering
early returns on IRA's funding.
There are also reputational risks to consider when evaluating
alternatives. In recent years the government has pursued increasingly
exotic positions in court, on both substantive matters such as
appraised values in tax deductions and Foreign Bank Account
Registration penalties, to procedural matters such as the limits of the
Administrative Procedure Act and ``1 day late'' taxpayer responses. The
result has been embarrassing losses all the way up to the U.S. Supreme
Court, some involving 9-0 rulings.\45\ It can be argued that the
government's use of ``strategic ambiguity'' in court can actually spawn
noncompliance from taxpayers who have diminished respect for the
government's position and feel they have little to lose by not settling
disputes.
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\45\ For background, see Bishop-Henchman, Joseph. ``Transforming
the Internal Revenue Service.'' Cato Institute Policy Analysis No. 942.
April 11, 2023, pp. 5-6, 13-14. https://www.cato.org/policy-analysis/
transforming-internal-revenue-service.
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(3) examine and evaluate, in detail, the commissioner's and taxpayer
advocate's recommendations about the funding mix under ira
With two of the Nation's top tax administration officials clamoring
for a remedy to the ``funding cliffs'' for taxpayer services in IRA's
funding for the Internal Revenue Service, this committee can exercise
leadership now by examining in-depth whether and how title I, part 3 of
the IRA (as well as other IRS funding) should be adjusted to reflect
more immediate needs. This should also include business systems
modernization, which could require more resources than anticipated.
Again, NTU emphasizes that this examination should not be viewed as
``zero-sum.'' Enhanced taxpayer services and business systems
modernization can make significant contributions to compliance and
resulting revenues. Of course, the committee is not the arbiter of
appropriations, but it is uniquely equipped, along with the House
Committee on Ways and Means, to comprehensively review the IRS's fiscal
trajectory. This needs to take place in ``real time,'' as
appropriations season gets into full swing.
(4) focus on a wide range of compliance tools
As this testimony has made quite clear, the goal of ``compliance''
does not always require the means of ``enforcement.'' As far back as
1997, Ernest Dronenburg, a member of the National Commission on
Restructuring the IRS, and former California Board of Equalization
leader, remarked that:
A .5-percent increase in voluntary compliance resulting from
taxpayer education and changing attitudes would increase
revenue in my state by over $400 million annually. Conversely,
doubling our current audit coverage from 3 percent to 6 percent
would produce less than half that amount.\46\
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\46\ Cited in Sepp, Pete. ``Comments before the Subcommittee on
Oversight, Committee on Ways and Means, `IRS Reform: Resolving Tax
Disputes,' '' September 13, 2017. https://www.ntu.org/publications/
detail/irs-reform-resolving-taxpayer-disputes.
Over the past 35 years, research into the effectiveness of non-
``enforcement'' compliance tools has become more sophisticated, with
encouraging results. For example, at the IRS/Tax Policy Center 2022
Joint Research Conference on Tax Administration, researchers Brian
Galle and Alexander Yuskavage presented a paper that examined the
impact of ``non-monetary sanctions'' on tax compliance. Utilizing a
data set of California's ``Top 500'' delinquent taxpayers (obviously
high-income earners), they found ``strong positive compliance
responses'' to a program that employed notices such as those ``warning
of the imminent publication of a taxpayer's personal information and
potential license suspension.''\47\ At the 2021 joint conference, Paul
Organ presented research indicating that ``collateral sanctions'' via
the IRS's passport certification and revocation process have ``an
immediate and strong positive effect on compliance actions for many of
those denied a passport request.''\48\ These tactics, while potentially
more focused and less intrusive than a levy or lien to satisfy a tax
debt, would still need to be wielded with caution.\49\
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\47\ The full joint research conference proceedings may be viewed
online at https://www.taxpolicycenter.org/event/12th-annual-irstpc-
joint-research-conference-tax-administration.
\48\ The full joint research conference proceedings may be viewed
online at https://www.taxpolicycenter.org/event/11th-annual-irstpc-
joint-research-conference-tax-administration.
\49\ See, for example, Wilford, Andrew. ``Tax `Shame Lists': 19
States Publish Private Info about Taxpayers.'' National Taxpayers Union
Foundation. April 19, 2023. https://www.ntu.org/foundation/detail/tax-
shame-lists-why-19-states-publish-private-info-about-taxpayers.
But there are many other compliance methods that are less coercive.
On a recent ``Tax Chat!'' hosted by the Center for Taxpayers Rights'
President Nina Olson, several experts in the field of tax compliance
stressed the importance of building public trust in the government's
expertise and fairness, not just fear of punishment. Erich Kirchler, a
psychologist from the University of Vienna, Austria, noted that using a
well-developed definition, each 1 percent increase in public trust of a
tax authority led to more than double that percentage in compliance.
Furthermore, the panelists discussed how ``nudges,'' such as asking for
additional information on a tax return can help to resolve compliance
issues before rather than after filing. One example a panelist gave was
a large drop in claimed dependents when filers were required to list
the Social Security numbers of those dependents. Notably, all agreed
that the IRA's funding ratio of ``enforcement'' to ``taxpayer
services'' was far too lopsided.\50\
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\50\ The full ``Tax Chat!'' to which this paragraph refers may be
viewed online at https://www.youtube.com/watch?v=DR01e0vWRmY.
If the IRS Strategic Operating Plan's goal of being able to ``help
the taxpayer to become as compliant as possible'' is to be achieved,
then tools such as these will need to be deployed in greater abundance.
An Oversight Board, combined with congressional encouragement, could
make a serious difference in making that happen.
(5) develop better measures for alternative compliance strategies
``Data and Analytics'' is an oft-repeated theme in the IRS's
Strategic Operating Plan for estimating the tax gap, finding patterns
of non-compliance, and improving the taxpayer service experience. Yet,
little has been discussed about the uses of data and analytics for
alternate compliance tools as well as the impact of enforcement on the
private sector.
At the 2023 Donald C. Lubick Symposium sponsored by the Tax Policy
Center, former National Taxpayer Advocate Nina Olson observed that very
little work has been done to accurately measure the fiscal benefit to
tax compliance by providing improvements in IRS taxpayer services.\51\
Conducting research in this area should be a top priority, elevating it
to the same academic and econometric level that has hitherto been
afforded largely just to the revenue windfalls from conventional
``enforcement'' approaches. Commissioning such research now, perhaps
using instructive language in IRS appropriations bills, would pay major
dividends in the near future as IRS compliance strategies move from
planning to execution.
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\51\ The full Lubick Symposium to which this paragraph refers may
be viewed online at https://www.taxpolicycenter.org/event/how-does-irs-
intend-invest-80-billion-over-next-decade.
In addition, as witness Chris Edwards observed, solid research on
the ``cost'' part of ``cost-benefit analysis'' associated with various
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compliance approaches is sorely needed.
As an example, for many years, National Taxpayers Union Foundation
has published an annual analysis of Federal personal and business
income tax system complexity, including estimates of paperwork burden
hours based on Office of Information and Regulatory Affairs (OIRA)
data.\52\ Two findings from recent studies are that many of OIRA's
``information collections'' are based on very scant responses from
taxpayers \53\ and that online reports are less than transparent:
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\52\ See, for example, Brady, Demian. ``6.5 Billion Hours, $260
Billion: What Tax Complexity Costs Americans.'' National Taxpayers
Union Foundation. April 17, 2023. https://www.ntu.org/foundation/
detail/65-billion-hours-260-billion-what-tax-complexity-costs-for-
americans.
\53\ Brady, Demian. ``Increasing Complexity Brings Back Bigger
Compliance Burdens.'' National Taxpayers Union Foundation, April 18,
2022. https://www.ntu.org/foundation/detail/increasing-complexity-
brings-back-bigger-compliance-burdens.
One simple way to improve transparency would be to separate
information collections that have no actual cost from those
where the cost is indeterminate. This way, users of the data
would not have to wade through successive pages and attached
Supporting Statements to find that out. The information on
OIRA's paperwork burden database should specify that a cost is
indeterminate instead of listing it as $0.\54\
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\54\ Brady, Demian. ``6.5 Billion Hours, $260 Billion: What Tax
Complexity Costs Americans.'' National Taxpayers Union Foundation.
April 17, 2023. https://www.ntu.org/foundation/detail/65-billion-hours-
260-billion-what-tax-complexity-costs-for-americans.
It should be noted that the Foundation's paperwork burden estimates
(6.5 billion hours and $260 billion) for individual and business filers
do not include compliance costs associated with IRS subregulatory
guidance. This type of tax compliance needs to be measured and made
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public.
Even with measurements that have more interest from researchers,
the principle of competition could be brought to bear in encouraging
more innovative, fresh approaches. After all, TIGTA recently pointed
out improvements that are needed at the IRS's Office of Research,
Applied Analytics, and Statistics (RAAS) for tax gap estimates:
RAAS does not have documented policies or procedures for
producing the Tax Gap estimates. While the IRS has high-level
quality and research guidelines, they do not discuss the Tax
Gap estimates. In lieu of documented procedures, RAAS has
developed technical papers for each component of the Tax Gap
estimates, which provide varying levels of specificity on the
data sources and methodologies used. In addition, RAAS does not
have written policies, procedures, or guidance to 1) specify
the frequency of issuing Tax Gap estimates or 2) help RAAS
analysts meet internal milestones for developing the Tax Gap
estimates. Instead, RAAS relies on its staff's experience with
developing previous Tax Gap estimates to meet internal
milestones. This raises concerns about the potential for a
lapse in quality, timeliness, and continuity of operations
following an unexpected departure of subject matter
expert(s).\55\
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\55\ Rascon, Jose. ``IRS Lacks a Clear Estimate of Uncollected
Taxes, Watchdog Says.'' Meritalk, March 31, 2023. https://
www.meritalk.com/articles/irs-lacks-a-clear-estimate-of-uncollected-
taxes-watchdog-says/.
Other Federal agencies, such as CBO, the Joint Committee on
Taxation, the Small Business Administration, and others can and should
be invited more regularly to share their experience and expertise on
tax compliance matters. So should private sector associations and
econometric firms. A well-functioning IRS Oversight Board, in
conjunction with IRSAC, could easily provide the ongoing direction to
coordinate this activity.
(6) ``tax certainty'' begins with following notice and comment procedures
NTU applauds the Strategic Operating Plan's emphasis on providing
guidance and certainty to taxpayers, including revision of notices ``by
simplifying the language,'' ``increasing the current rate from five to
seven notices per year to as many as 500 per year,'' ``develop[ing]
additional, tailored tax certainty programs,'' and growing ``capacity
for addressing taxpayer issues through guidance interpreting the tax
law.''\56\
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\56\ IRS. (April 2023).``Internal Revenue Service Inflation
Reduction Act Strategic Operating Plan: FY 2023-2031,'' pp. 52-54.
Retrieved from: https://www.irs.gov/pub/irs-pdf/p3744.pdf (accessed May
11, 2023).
These efforts would have much more credibility if Congress or the
courts were to affirm that the IRS must follow the Administrative
Procedure Act requiring that ``agency decisions be made only after
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affording interested persons notice and opportunity to comment.''
My colleague at NTU Foundation, Joe Bishop-Henchman, recently
explained:
The IRS and the Treasury Department do not follow APA
procedures for most of the hundreds of official changes they
make annually to how they enforce the tax code, ``having
claimed for several decades that their rules and regulations
are exempt from those requirements.'' They characterize APA
directives as merely interpretive, not legally binding, and
therefore they are not subject to the APA. But even when the
Treasury Department has initiated a formal
notice-and-comment rulemaking process, it often skips steps. In
more than 36 percent of cases, it made the proposed rule
legally binding before accepting any comments, and in nearly 5
percent of cases, it skipped accepting comments and simply
adopted the final rule.
It is no accident that the IRS set up a situation where it
claimed its one-sided and burdensome regulation was both exempt
from the APA process and unable to be challenged because of the
Anti-Injunction Act, or that the IRS can take months to respond
to taxpayers, but taxpayers automatically lose if they take
even 1 extra day to respond. The CIC Services and Boechler
decisions chip away at defenses that the IRS has often used to
insulate its subregulatory ``guidance'' from legal challenge.
But there still has not been a congressional or judicial
declaration that the IRS must follow the APA. Until that
happens, the IRS enjoys, as six Federal judges observed in
2011, ``a world in which no challenge to its actions is ever
outside the closed loop of its taxing authority.''\57\
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\57\ Bishop-Henchman, Joseph. ``Transforming the Internal Revenue
Service.'' Cato Institute Policy Analysis No. 942. April 11, 2023, p.
7. https://www.cato.org/policy-analysis/transforming-internal-revenue-
service.
The Service can also do more to clarify for taxpayers the degree to
which they may rely on subregulatory guidance such as the Internal
Revenue Bulletin, Revenue Procedures, and Technical Advice Memorandums.
Furthermore, the ``Job Aid'' process, which involves practitioners more
thoroughly in the mechanics of compliance with complex issues should be
amplified.\58\
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\58\ See, as an example, Sepp, Pete. ``IRS Considering Backdoor
Death Tax Hike.'' Comments to Internal Revenue Service re: Docket ID:
IRS-REG-163113-02, RIN 1545-BB71. November 2, 2016. https://
www.ntu.org/publications/detail/irs-considering-backdoor-death-tax-
hike.
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(7) tax simplification: the ``broken record'' that keeps playing
No other single item in NTU's testimonies on tax administration
over past decades has made the ``top 10'' list of recommendations than
the need to simplify the tax laws. While we are well aware that this
task is often extolled but rarely practiced, we once again offer some
practical first steps.
Section 4022 (a) of RRA 98 required the IRS to produce an annual
report to Congress on ``sources of complexity in the administration of
the Federal tax laws.'' The provision was successful, even though IRS
compliance with it was limited. According to the National Taxpayer
Advocate, the tax agency has issued just two annual reports compliant
with the 1998 statute, but in both instances, ``Congress adopted
legislation to address each area of complexity referenced in the
reports, and the IRS addressed the administrative problems they
uncovered. Thus, the IRS's decision to discontinue the reports has
likely contributed to tax complexity.'' The last report was published
in 2002; Congress should order resumption of the annual reports now.
NTU also concurs with the Taxpayer Advocate's recommendation that
``the IRS establish a process to automatically provide the tax writing
committee staff with a list of specific front-line technical experts
who can discuss the administrability of pending (or existing)
legislation directly with the tax-writing committees,'' as provided in
section 4021 of RRA 98. The most important results would be in
budgetary savings to the IRS and reduced private-sector compliance
costs--a win-win situation for taxpayers.
Furthermore, the need for a regular review of the tax laws with an
eye toward clearing away unnecessary, conflicting, or cumbersome
provisions will always be extant. NTU's staff recalls vividly from
field hearings and other submissions to the Commission that many
members of the private-sector tax community were willing to volunteer
substantial time and energy to make suggestions for simplification. A
panel, meeting once every 4 years, would harness this volunteer
activity.
There are several models for a process such as this, among them the
creation of an executive branch body (e.g., via the Federal Advisory
Committee Act). Its mission: to evaluate title 26 of the U.S. Code and
title 26 of the Code of Federal Regulations in order to methodically
identify specific opportunities for simplification, clarification, and
repeal of provisions that are complex, contradictory, difficult to
administer, or outdated, and provide actionable recommendations that
the executive and legislative branches can implement in expedited
fashion.
Members would include individual taxpayers, business taxpayers, tax
practitioners, tax attorneys, academics, and former public officials
with an expertise in tax administration (subject to Federal employment
rules). The Commission's management could be drawn from the National
Taxpayer Advocate's Office, the IRS Oversight Board, IRSAC, ETAAC, or
the Treasury Inspector General for Tax Administration. Participation
and consultation of congressional staff would be invited and
encouraged. The Commission's report could be partitioned according to
those requiring legislative action and those necessitating executive
action. In order to precipitate such action, the legislative portion
could be required by law to be received by the tax-writing committees
and brought to the floor under privileged consideration. The executive
portion could be automatically referred to the rulemaking process under
APA.
The preceding outline would require additional details. As we have
been for 25 years, NTU is ready and willing to assist in developing the
charter for this Commission.
(8) secure the service's it capacity before
launching ambitious cyber-compliance plans
At the Donald C. Lubick Symposium mentioned earlier, former
Commissioner Charles Rossotti mentioned the need to ``go slow'' when
ramping up new compliance strategies.\59\ One area where NTU believes
the IRS must indeed learn to walk before it runs is on the Information
Technology track.
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\59\ The full Lubick Symposium to which this paragraph refers may
be viewed online at https://www.taxpolicycenter.org/event/how-does-irs-
intend-invest-80-billion-over-next-decade.
By now, every member of this committee is well aware of the
Service's IT problems with customer service, and all of us hope that
Commissioner Werfel's ambitious goal of completely revising the
interoperability of the Individual Master File by 2028.\60\ Although
the Service's IT operations have certainly benefited from the
leadership of Chief Information Officer (CIO) Sieger and hopefully from
Acting CIO King, as the Government Accountability Office recently
pointed out in February of this year, ``[a]s of August 2022, the IRS
had 21 modernization initiatives, including 9 to replace its outdated
IT systems. However, 6 of those 9 initiatives did not specify how they
would dispose of outdated systems--a key element in IT
modernization.''\61\ This is but one of many challenges on the road
ahead.
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\60\ Rascon, Jose. ``IRS Chief Aiming for Individual Master File
Update by 2028.'' Meritalk, April 20, 2023. https://www.meritalk.com/
articles/irs-chief-aiming-for-individual-master-file-update-by-2028/.
\61\ U.S. Government Accountability Office. ``Information
Technology: IRS Needs to Complete Modernization Plans and Fully Address
Cloud Computing Requirements.'' GAO-23-104719, January 12, 2023.
https://www.gao.gov/products/gao-23-104719.
Still, there are many areas of IT at the Service outside of
taxpayer-facing platforms that will need to be updated . . . and none
will require greater operational security than those platforms that
will be designed for compliance research and data-gathering purposes.
The Department of Justice has recently announced the formation of a
Digital Asset Coordination Network to ``combat the growing threat posed
by the illicit use of digital assets to the American public.''\62\
Digital assets are a key focus of the IRS as well as IRA supporters who
see opportunities for revenue enhancement through increased compliance
funding.
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\62\ U.S. Department of Justice. ``Justice Department Announces
Report on Digital Assets and Launches Nationwide Network.'' September
16, 2022. https://www.justice.gov/opa/pr/justice-department-announces-
report-digital-assets-and-launches-nationwide-network.
Aside from the fact that international criminals are notoriously
difficult targets for tax compliance efforts, the fact that the IRS
will be ``fishing in the pond'' of digital assets more often means that
cybersecurity will take on special importance. Even if the Service is
interested primarily in compliance from those who aren't running
criminal schemes but are simply failing to properly pay taxes on
legitimate digital asset transactions, the Service will be casting a
wide net. Caught in that net will likely be some of the most skilled
online malefactors in the world. The IRS must be prepared for anything
to happen from these interactions. A breach of the Service's IT systems
could become a portal through which criminals or even bad-actor states
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could compromise our entire national security.
Furthermore, while technology is an important driver in enhancing
taxpayer service and compliance, it is not without risks to both
objectives. During a recent Tax Policy Center webinar entitled ``Can
Machine Learning Improve Tax Enforcement?'' Alex Engler of the
Brookings Institution expressed support for the IRS's direction of its
5-year-old machine learning techniques for detecting noncompliance but
cautioned that the technology should be carefully monitored. As he
explained, AI could improperly identify certain taxpayers for
examination or enforcement, thus depriving them of certain deductions
or credits. Some of the challenges to AI functioning properly in this
area are that algorithms may be based on prior taxpayer case records,
delays in court cases make ``fresh'' data problematic, and the shifting
tax laws present a challenge to modeling. Also, parts of the tax code
are very complicated, open to different interpretations and
ambiguity.\63\
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\63\ See Tax Policy Center, Urban Institute Webinar. ``Can Machine
Learning Improve Tax Enforcement?'' 2022. The entire webinar to which
this paragraph refers may be viewed online at https://www.youtube.com/
watch?v=fIZYd3o7wJQ.
The Strategic Operating Plan's commitment to ``[continue to
implement best practices in cybersecurity'' is laudable, but given
recent evaluations, much remains to be done. Last year, TIGTA found
that the IRS failed to meet 17 of 20 ``Core Inspector General Metrics''
established for cybersecurity government-wide.\64\ In addition to
taxpayer services, cybersecurity must be a foundational priority for
the Service before other initiatives can move forward. Congress must
provide firm guidance to the IRS during the appropriations process to
ensure both these ends are adequately funded out of existing resources.
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\64\ Gaetano, Chris. ``TIGTA: IRS Cybersecurity Falls Short on 17
of 20 Metrics.'' Accounting Today, July 21, 2022. https://
www.accountingtoday.com/news/tigta-irs-cybersecurity-programs-not-
effective-falls-short-on-17-of-20-metrics.
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(9) plan for hearings on other approaches to improving compliance,
including access to courts and true ``community engagement''
NTU continues to believe that as with any other area of compliance
with laws, tax compliance benefits from the existence of safeguards to
Americans' fundamental rights. When citizens feel that everyone will
get a ``fair shake'' from examinations, collections, appeals,
jurisprudence, and other aspects of tax administration, they will more
readily respect and follow the laws of the system. With so many
compliance resources flowing to the IRS, the committee could plan
ahead.
Although the 1988 and 1998 taxpayer rights laws provided for
certain exceptions, taxpayers still generally cannot enforce their
rights in court until after they have been violated. Under section 7421
of the Internal Revenue Code, no lawsuit can be brought by any person
in any court for the purpose of restraining the assessment or
collection of a tax, except under limited circumstances.
The case law around the Anti-Injunction Act further impedes the
ability to restrain the collection of the tax. In theory, injunctions
can be granted where the failure to grant relief would result in
irreparable damage to the taxpayer, but in practice, this provision is
virtually unusable. With the more recent CIC Services decision, the IRS
can no longer hide behind the Act for every reason, such as penalty
determinations. Nonetheless, the Declaratory Relief Act, which allows
citizens to file a suit that can persuade a court to declare their
rights, indicates that the law applies ``except with respect to Federal
taxes.'' The Federal Tort Claims Act presents additional barriers to
tax-related controversies.
Congress should give serious consideration to providing citizens
with the limited ability to stop the IRS from violating their rights
through litigation. Doing so will involve some level of controversy,
and will no doubt prompt lengthy deliberation. As a starting point, my
colleague Joe Bishop-Henchman has suggested ``narrowing the Anti-
Injunction Act to limit only preliminary or temporary injunctions.''
Another approach might be for Congress to re-codify the 10 taxpayer
rights in the Protecting Americans from Tax Hikes Act of 2015 so that
the rights may be invoked in actual disputes, instead of ``mere
suggestion[s] for IRS employees that they can safely ignore.''\65\
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\65\ Bishop-Henchman, Joseph. ``Transforming the Internal Revenue
Service.'' Cato Institute Policy Analysis No. 942. April 11, 2023, p.
12. https://www.cato.org/policy-analysis/transforming-internal-revenue-
service.
Besides weightier issues such as these, during markup of a version
of the Taxpayer First Act in 2018, NTU offered suggestions to improve
the taxpayer experience in Tax Court. Several Tax Court officials,
including Chief Special Trial Judge Peter Panuthos, have been
contemplating a shift in the Court's role to provide a fairer venue for
taxpayers. At a 2017 International Conference on Taxpayer Rights, Judge
Panuthos of the Court provided a truly compassionate (and in his case
customary) view of his role, in discussing how he thought the Court
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might be able to engage in ``affirmative judging.''
Andy Roberson of McDermott Will and Emery wrote:
Drawing on a report by a law school professor, Judge Panuthos
discussed whether judges should follow the ``passive norm''--
just call ``balls and strikes,''--or engage in affirmative
judging (i.e., assisting taxpayers by asking questions and
being more involved in the process). The discussion was very
interesting, particularly with the point being made that in
complex cases such as transfer pricing, judges routinely have
conference calls with the parties and are actively engaged in
trying to narrow the issues and get the parties to agree on
what is really at issue.\66\
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\66\ Cited in Sepp, Pete. ``Comments on the Taxpayer First Act to
the Honorable Lynn Jenkins and the Honorable John Lewis.'' April 4,
2018.
Five years ago, the Tax Court's Judicial Conference discussed
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several changes to procedures that Congress ought to encourage:
Codification of how amicus briefs can be filed in Tax Court
cases. Currently individual Tax Court judges have discretion
over how and where they are accepted.
Availability of more Tax Court documents (such as filings,
not just decisions) online to the public, not just to litigants
or those who are able to visit the Tax Court's facility in
Washington, DC. Appropriate privacy guidelines, especially for
pro se taxpayers, would be necessary.
Clearer and more consistent notices for non-party
subpoenas.\67\
---------------------------------------------------------------------------
\67\ Ibid.
The committee could be very helpful by formulating legislative
language either directing the Tax Court to develop these procedures or
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expressing the Sense of Congress that the Tax Court should do so.
NTU wishes to remind committee members in recognition of this
hearing's title, that for many years traditional ``law enforcement''
oversight mechanisms have been discussed for the IRS as well. One was
brought to the attention of the Restructuring Commission during its
Omaha, NE field hearing on April 4, 1997. During those proceedings,
Samuel Walker, a Professor of Criminal Justice at the University of
Nebraska-Omaha, offered a proposal for an IRS citizen review board.
This office, modeled after citizen review and complaint entities
established in many cities for police departments, would not be charged
with resolving tax administration problems (the mission of the National
Taxpayer Advocate) or allegations of criminal behavior (investigated
through the Inspector General or the Department of Justice). Rather, it
would hear taxpayer concerns over specific instances of mistreatment by
IRS personnel and make recommendations for disciplinary action.
Walker outlined a structure whereby an External Independent
Complaint Auditor, appointed in consultation with Congress, would
oversee an Internal Office of Citizen Complaints to receive specific
reports from citizens and, summarize annually any changes to personnel
procedures that might help to minimize incidents and complaints in the
future. The Restructuring Commission's final report proposed, instead,
that the IRS should ``centralize the cataloging and review of taxpayer
complaints of IRS misconduct on an individual employee basis.'' This
advice, subsequently embedded in RRA 98, has failed to provide a more
formalized grievance procedure which, along with regular reporting on
personnel remedies that a citizen review board can provide, could
result in more productive resolution of disciplinary problems among tax
agency employees.
Congress could request a study from the IRS Oversight Board or
National Taxpayer Advocate to evaluate the experiences of city police
department complaint entities since 1997, and explore the suitability
of updating Walker's proposal to current circumstances with the
Strategic Operating Plan.\68\
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\68\ For background see, Sepp, Pete. ``Comments before the
Subcommittee on Oversight, Committee on Ways and Means, `IRS Reform:
Resolving Tax Disputes,' '' September 13, 2017. https://www.ntu.org/
publications/detail/irs-reform-resolving-taxpayer-disputes.
There are many other aspirational proposals we would gladly raise
with committee members. The ones outlined here would plainly require
bipartisan alignment that would need to take place over a potentially
lengthy period of time. Nonetheless, it will pay--literally--to think
ahead about proposals such as these, while the committee concentrates
on near-term goals such as those articulated in legislative form below.
(10) work on bipartisan legislation for much-needed
reforms to tax administration
Despite recent, and at times heated, political rhetoric over the
IRS and the $80 billion funding infusion provided to the agency by the
IRA, lawmakers in both parties continue to work together on legislation
that would improve tax administration. Doing so would foster a spirit
of cooperation that could make all of the nine recommendations above
less difficult to confront.
Last month, NTU was proud to support the Taxpayer Advocate
Enhancement Act, introduced by Senators Ben Cardin (D-MD) and Bill
Cassidy (R-LA) in the Senate (S. 1283)\69\ and Rep. Randy Feenstra (R-
IA) and four bipartisan cosponsors in the House (H.R. 2755).\70\ This
legislation would allow the National Taxpayer Advocate (NTA) to appoint
her own counsel, enhancing the independence of the Office of the
Taxpayer Advocate and improving the NTA's ability to provide sound,
sensible, and nonpartisan recommendations on tax administration policy.
NTU has supported allowing the NTA to hire her own counsel for years,
since former NTA Nina Olson first included the recommendation in the
annual ``Purple Book.''\71\
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\69\ Congress.gov. ``S. 1283--Taxpayer Advocate Enhancement Act.''
Introduced April 25, 2023. Retrieved from: https://www.congress.gov/
bill/118th-congress/senate-bill/1283 (accessed May 11, 2023).
\70\ Congress.gov. ``H.R. 2755--National Taxpayer Advocate
Enhancement Act of 2023.'' Introduced April 20, 2023. Retrieved from:
https://www.congress.gov/bill/118th-congress/house-bill/2755 (accessed
May 11, 2023).
\71\ For the latest Purple Book, released in January 2023, see
Taxpayer Advocate Service. ``National Taxpayer Advocate 2023 Purple
Book.'' January 2023. Retrieved from: https://
www.taxpayeradvocate.irs.gov/reports/2022-annual-report-to-congress/
national-taxpayer-advocate-2023-purple-book/ (accessed May 11, 2023).
Last month we also supported the Cutting Paperwork for Taxpayers
Act (H.R. 2978),\72\ introduced by Reps. Abigail Spanberger (D-VA) and
Young Kim (R-CA). This common-sense legislation would prevent taxpayers
receiving a late refund from the IRS from then also having to pay taxes
on the interest they justly receive for the agency's delays.
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\72\ Congress.gov. ``H.R. 2978--Cutting Paperwork for Taxpayers
Act.'' Introduced April 27, 2023. Retrieved from: https://
www.congress.gov/bill/118th-congress/house-bill/2978 (accessed May 11,
2023).
Bipartisan legislation introduced earlier in the 118th Congress by
Senators Chuck Grassley (R-IA) and Chair Wyden (D-OR) in the Senate,
and Rep. Mike Kelly (R-PA) in the House, would significantly enhance
whistleblower protections at the IRS. This important bill, the IRS
Whistleblower Program Improvement Act (S. 625, H.R. 1300),\73\
dovetails with two critical and long-running initiatives advanced by
NTU: improving Federal tax administration and enhancing Federal
protections for courageous individuals blowing the whistle on wasteful
spending or abuse of power within the government.
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\73\ Congress.gov. ``S. 625--IRS Whistleblower Program Improvement
Act of 2023.'' Introduced March 2, 2023. Retrieved from: https://
www.congress.gov/bill/118th-congress/senate-bill/625 (accessed May 11,
2023); Congress.gov. ``H.R. 1300--IRS Whistleblower Program Improvement
Act of 2023.'' Introduced March 1, 2023. Retrieved from: https://
www.congress.gov/bill/118th-congress/house-bill/1300 (accessed May 11,
2023).
Another bipartisan bill introduced in the current session of
Congress, the Electronic Communication Uniformity Act (S. 1338)\74\
from Senators Marsha Blackburn (R-TN) and Catherine Cortez Masto (D-
NV), would ``[provide] that such documents and payments [submitted
electronically to the IRS by taxpayers] shall be deemed filed or made
on the date on which they are sent electronically, regardless of the
date on which the IRS actually receives or reviews them.'' This
legislation would establish parity between electronic and paper
filings, a recommendation NTU called for in an April 2022 written
submission to this committee.\75\
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\74\ Congress.gov. ``S. 1338--Electronic Communication Uniformity
Act.'' Introduced April 27, 2023. Retrieved from: https://
www.congress.gov/bill/118th-congress/senate-bill/1338 (accessed May 11,
2023).
\75\ Sepp, Pete; and Lautz, Andrew. ``NTU Submits IRS Reform
Recommendations Ahead of Agency's Budget Hearing.'' NTU, April 7, 2022.
Retrieved from: https://www.ntu.org/publications/detail/ntu-submits-
irs-reform-recommendations-ahead-of-agencys-budget-hearing (accessed
May 11, 2023).
In summary, there is no shortage of productive, constructive, and
bipartisan bills for this committee to consider in the months ahead
that could reform IRS procedures and processes and improve tax
administration as the agency embarks on spending up to $80 billion in
supplemental funding over the next 10 years. There may be little to no
agreement among the two parties over whether to keep or rescind the
supplemental funding provided to the IRS by the IRA, and there may be
even less agreement over how much supplemental funding may yield
additional revenues for the Treasury, but there are plenty of areas of
agreement that would improve the IRS and the taxpayer experience with
the agency.
at your service: the taxpayers first project
Asking policymakers from many perspectives to work together, as
this testimony does, is easier said than done. Nonetheless, perhaps the
committee can draw some encouragement from a recent undertaking by the
National Taxpayers Union Foundation.
Taxpayers for IRS Transformation (Taxpayers FIRST) is designed to
convene an expert group of non-governmental stakeholders with a diverse
set of backgrounds and perspectives to offer guidance to the IRS as it
plans to spend the most significant infusion of funding it has ever
received. The Project aims to assist IRS officials and policymakers so
that the new funding is spent effectively, improves taxpayer services,
upgrades outdated technology, and helps efficiently reduce the tax gap
while respecting and strengthening taxpayer rights and due process.\76\
These experts include:
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\76\ For further information and updates in the Taxpayer FIRST
project's activities, please visit www.taxpayers-first.org.
Nina Olson, former National Taxpayer Advocate.
Fred Goldberg, former Commissioner of the IRS.
Caroline Bruckner, managing director of the Kogod Tax Policy
Center.
Jason Fichtner, vice president and chief economist at
Bipartisan Policy Center.
Jeff Trinca, former tax counsel for Senator David Pryor (D-
AR) and currently founding vice president with Van Scoyoc
Associates.
Janet Holtzblatt, senior fellow at the Urban-Brookings Tax
Policy Center.
Erica York, senior economist at Tax Foundation.
Renell Dubay, Kay Perrone and Associates.
Gordon Gray, director of fiscal policy at American Action
Forum.
Fred Forman, former IRS Associate Commissioner of Business
Systems Modernization.
Jason DeCuir, partner at Advantous Consulting.
Adam Michel, former Deputy Staff Director of the Joint
Economic Committee and current director of tax policy at Cato
Institute.
Barbara Robles, former principal economist at the Federal
Reserve Board of Governors as well as the Joint Committee on
Taxation and former tax examiner for the IRS.
Alex Brill, senior fellow at American Enterprise Institute.
Peter Mills, senior manager of tax policy at AICPA.
Rebecca Thompson, vice president of strategic partnerships
and network building at ProsperityNow.
These individuals, joined by leaders from the National Association
of Enrolled Agents and more to follow, will be conducting many
consultative sessions this year on matters such as measuring the tax
gap, improvements to customer service, modernization, and protection of
taxpayer rights and privacy. Taxpayers FIRST will be presenting its
recommendations in reports to be released at public events into 2024.
The National Taxpayers Union Foundation has been able to initiate
Taxpayers FIRST in part to serve as a resource to policymakers who are
earnestly seeking solutions to many of the challenges facing the IRS's
future success. This panel of experts, which will add members over
time, will be available on tax administration matters at any point in
time. Please consider Taxpayers FIRST to be an advisor in the
committee's work.
conclusion
How do organizations execute successful transformations? This is
the central question subsequent to the enactment of $80 billion of
additional funding for the IRS. In my opinion, such transformations,
whether in the private or public sectors, come from several sources.
From employees. Private companies, on occasion, are prompted
to change through their workforces. IRS workers proved to be
key in advising the National Commission on Restructuring the
IRS, as well as this committee during the deliberations over
RRA 98. They were able to identify leadership, personnel
policy, and structural issues that were standing in the way of
success for the Service's next chapter. So far, Congress has
heard little from Service employees about the Strategic
Operating Plan.
From customers. Private-sector actors are under constant
pressure to innovate and deliver, at the risk of losing
customers. To be frank, taxpayers can't choose which IRS to
use, and therefore are not ``customers'' in the conventional
sense. They can only exert a modest degree of influence over
the way the Service operates by volunteering for IRSAC, ETAAC,
the Taxpayer Advisory Panels, and occasionally, through
litigation.
From competitors. Loss of market share from firms that
provide a product faster, cheaper, and better often
incentivizes private-sector companies to keep innovating or
fade away. Here again, except for a few Americans who take the
drastic step of renouncing citizenship, the IRS has no
``competitor'' at the Federal level. ``Patriotic'' or not,
companies and individuals abroad seeking to invest in the
United States, as well as those already here who are
contemplating expansion, can evaluate whether tax
administration climates elsewhere in the world are more
hospitable.
From shareholders. This group is a fulcrum of leverage that
can often change the entire direction of a private company.
Alas, there is not a direct equivalent in government, save the
voters, who get to speak more on the general path of government
than specific issues like IRS management.
From boards of directors and others. Many private-sector
companies are reoriented in a more productive direction by
positive action from boards of directors and other entities
that are outside the day-to-day management structure. So it
must be with the IRS--a functioning Oversight Board, along with
IRSAC, ETAAC, TAPs, Congress, and institutions outside
government such as Taxpayers FIRST, and many, many more
institutions yet to weigh in, can have a role in a
transformation for which all Americans have a stake.
This testimony has been broken into sections using the theme of
``realities,'' no doubt leading some to wonder whether the
recommendations above are realistic themselves. The answer is, they
have to be. No, activities such as rebalancing the role of the courts,
or imposing a tax simplification process, can happen overnight. But
other steps, such as reconstituting the IRS Oversight Board and
evaluating the IRA funding mix, can and should happen now.
Each item in these recommendations may have its own timetable, but
several are well within the grasp of this Congress, this year. For the
sake of all taxpayers, let us move forward.
I am most grateful to all of you for engaging in this hearing and
for devoting so much attention to these lengthy remarks.
______
Questions Submitted for the Record to Pete Sepp
Question Submitted by Hon. Catherine Cortez Masto
Question. Taxation in Indian Country is unnecessarily complex and
hinders economic development in areas that need it most. Often, the
reason for the complexity is that Tribal Governments are not always
consulted when Federal tax legislation is being drafted or during the
regulatory process. As a result, Tribal Governments do not have access
to the same economic development tools as State and local governments;
this only exacerbates the health, education, and financial disparities
in Native American communities.
In your testimony you talk about the need to focus on compliance
and to use existing assets for management. My office is working with
Tribal stakeholders to support the advancement of American Indian and
Alaska Native communities and foster economic opportunities, but there
needs to be Tribal consultation when it comes to compliance.
Can you discuss how the IRS can bring Tribes to the table to ensure
compliance? How can more resources help outreach?
Answer. Historically the IRS has tended to undervalue proactive
(and preventative) stakeholder and taxpayer outreach and consultation
as tools to encourage compliance. They are often at the front of the
line for budgetary reductions when the Service is strapped for funds.
For example, there are currently no IRS Taxpayer Assistance Centers
overseas for Americans living abroad, while only recently have the TACs
been better staffed in Puerto Rico, a U.S. territory. The new IRA
funding should prioritize services like these, which aid in compliance
on the front end, before pouring billions more dollars into
``enforcement'' for post-filing scenarios, which are much costlier on a
per-case basis.
The problem is far worse with Tribal stakeholders. A common
misconception is that all economic activities of Tribes and their
members are federally tax-exempt, when in reality the situation is much
more complicated--especially for individual Tribal members.
Maladministration of the tax laws, or a poor understanding of the
Service's part of how Tribal Governments and their members actually
function economically, can lead to lost opportunities for growth and
prosperity.
I fully agree with your concerns and would recommend the following
steps to help ease the problems arising from tax complexity's impact on
American Indian and Alaska Native communities:
(1) H.R. 2676, the IRS Restructuring and Reform Act of 1998,
required a Tax Complexity Analysis of legislation affecting
large numbers of individuals or businesses as it moved through
Congress. Unfortunately, this provision has often been waived.
I would suggest modifying this section of H.R. 2676 (section
4022 (b)) to allow a member of the Senate Finance or House Ways
and Means Committee to request a tax complexity analysis from
JCT and IRS for any bill brought before the committee. This
could allow a member to generate early discussion on the impact
of a given tax bill on Tribal Governments and members.
(2) Provide for regular meetings of the IRS Taxpayer Advocacy
Panels on a rotating basis in American Indian and Alaska Native
Communities, in order to obtain practical recommendations for
the design of publications and tax returns for Tribal members.
(3) Request that GAO, the National Taxpayer Advocate, and the
IRS Advisory Council consult directly with Tribal Governments
to catalog the sources of complexity, confusion, and
frustration that Tribal Governments have experienced due to
lack of consultation over the design of Federal tax laws. This
collection of information could allow the Treasury's Office of
Tribal Affairs as well as appropriate committees in Congress to
work together in addressing the worst areas of complexity.
All these initiatives would require greater funding, but the
investment would be worthwhile.
______
Questions Submitted by Hon. Todd Young
Question. One premise of this hearing is that if the House-passed
Limit, Save, Grow Act of 2023 were to become law, none of the taxpayer
services improvements at the IRS would have taken place or could be
sustained. Is this true?
Answer. While the Limit, Save, and Grow Act would certainly curtail
and restrict the growth of IRS funding, choices could still be made
within those funding levels to prioritize taxpayer services. By most
accounts, the IRS will have spent somewhere in excess of $500 million
of IRS funding on taxpayer service improvements by June 30, 2023. I
believe this expenditure certainly is having palpable, salutary effects
on the taxpayer experience in contacting and interacting with the IRS.
It was a wise investment, not only for building goodwill in the tax
filing population but also for aiding compliance with tax laws (a far
less expensive way to enforce the laws compared to audits and other
post-filing activities). A $500+ million shift of funding toward
taxpayer services could be accommodated under the Limit, Save, and Grow
Act. However, I would also contend that for longer-term improvements in
the way the Service operates, additional funds, potentially beyond
those that the Limit, Save, and Grow Act, could be desirable if
accompanied by proper reforms and guard rails. I believe it is
particularly important to acknowledge the need for multiyear capital
expenditures to finally embark on the urgently needed Business Systems
Modernization at the Service. Without a successful, timely, and well-
overseen BSM, none of the goals that Republicans or Democrats on the
committee have for the IRS--whether customer service improvements,
respect for taxpayer rights, or even stricter compliance--can be
reached. Whether effectuated by additional funding, shifts in funding,
or a combination thereof, this is the one critical piece on which
Congress should focus.
Question. In your experience, what have been the key ingredients in
past IRS transformation bills that have made success for taxpayers
likelier?
Answer. Every successful IRS transformation effort has, in my
opinion, shared several elements:
(1) Detailed strategic planning that sets specific objectives
and timelines (see the Taxpayer First Act report to Congress)
rather than repetitive aspirations that later become obfuscated
(see the Strategic Operating Plan);
(2) Ongoing guidance from experts outside the IRS and Congress
that can provide day-to-day consultation on the implementation
of strategic planning (e.g., the IRS Oversight Board created in
the IRS Restructuring and Reform Act of 1998, now dormant due
to lack of a quorum of members);
(3) Consistent ``feedback loops'' that allowed periodic course
corrections from Congress to reach objectives of reform (e.g.,
Taxpayer Bill of Rights of 1998, ``T2'' of 1996, and RRA of
1998).
(4) A focus on transforming first, rather than the need to hit
some specific revenue target. Prior to the infusion of funds
from IRA, no other legislation purporting to have serious
intentions of changing direction at the IRS was so driven by
``the score.'' Lawmakers all recognized the revenue impacts of
the IRS reform legislation they were proposing, but the
priority was to set the proper stage for success, from which
revenues would eventually flow.
Question. Do you believe that the $15 million in Inflation
Reduction Act (IRA) funding to study the feasibility of a government-
run filing and tax preparation portal was a wise use of resources?
Should the development of this portal be a priority program for the
IRS?
Answer. As I mentioned earlier, Business Systems Modernization must
be the sole, strongest focus of time, talent, and resources at IRS. The
development of the Direct File portal represented the polar opposite of
what the Service should have been doing in the area of technological
improvement. NTU has supported the public-private consortium known as
Free File, while acknowledging the need for evolving that partnership
into one that can serve even more taxpayers with private-sector driven
innovation. Direct File was a diversion of resources at a critical
point in the Service's plans for modernization, not to mention a
contravention of the statutory language's intent that the Service
develop only a study rather than an actual system. This is an example
of misplaced priorities.
Question. How much of recent improvements at IRS--such as answering
phones and processing returns--are due to the end of pandemic-related
workplace and managerial procedures versus new funding from IRA?
Answer. This is a difficult question to answer, precisely because
many of the measurements the IRS should have been taking during the
pandemic were never done. Nonetheless, there are some clues that fall-
offs in certain needs among the tax filing population may be driving at
least some of the improvements in customer service. As an example to
your point, Senator, GAO has reported that in 2023 the IRS answered 7.7
million calls versus 4.6 million in 2022. Yet, the response rate that
IRS officials have touted is tremendously impacted by the fact that far
fewer taxpayers contacted the IRS in 2023 than in 2022 (25.9 million
versus 63.7 million). Much of this is due to the expiration of
pandemic-era tax relief programs. Furthermore, the Service does not
report on the outcomes of all its calls. How many calls, once answered,
provided the help the taxpayer needed, as opposed to the taxpayer being
told their question was ``out of scope'' and that they should consult a
tax advisor instead. The need to develop better metrics of the relative
volume of service, as well as the quality of service, remains apparent,
and is one topic of study for the advisory board of our research arm's
Taxpayers FIRST project.
Question. Going forward, how important will stakeholder input into
the uses of IRA funding for the IRS be?
How, where, and when can such input be facilitated?
Answer. The worst possible outcomes from IRA funding will stem from
neglect--neglect of stakeholder input, neglect of oversight from
entities such as TIGTA and National Taxpayer Advocate, and neglect of
Congress (largely due to a crowded legislative agenda). Many of the
traditional stakeholder input processes that help to inform the
decisions of many other Federal entities--such as the Administrative
Procedure Act--have been a source of controversy and litigation for
more than a decade with the IRS. Other forums for stakeholder input,
among them the Taxpayer Advisory Panels, the IRS Advisory Council,
National Taxpayer Advocate, and the Electronic Tax Administration
Advisory Committee, can provide useful guidance to the Service, but
such guidance is not binding and can span a wide range of
administrative issues.
Several additional steps can and should be taken to facilitate
actionable input on uses of IRA funding. These include:
(1) Although the IRA funding has taken place outside the
regular appropriations process, there is no reason why that
process should not provide appropriations committees with the
opportunity to evaluate the effectiveness of various IRA-funded
initiatives. The committees should be able to demand cost-
benefit analysis and progress reports from the IRS on each
element of the Strategic Operating Plan. After all, how IRA
funding is being put to work directly impacts decisions for
allocation annual appropriations to the IRS, and vice versa.
(2) I must reiterate here the value of the IRS Oversight Board
concept which, for a few years after enactment of the 1998 IRS
Restructuring and Reform Act, provided incisive managerial
recommendations and reports to Congress on how transformation
funding was spent in accordance with the objectives of the
statute and the strategic plans developed by IRS leadership.
Congress can and should consider legislation improving this
concept.
(3) While there are numerous entities collecting input from
stakeholders on various aspects of tax administration (see list
above), I believe that insufficient consideration is currently
being given to the role that the recently established Taxpayer
Experience Office at IRS could play as a central coordinator of
that input. The Committee could request that the Commissioner
task the TEO with serving as a clearinghouse for IRA funding
input from stakeholders and report quarterly to Congress on
trends. Alternatively, if independence or transparency is a
concern, the National Taxpayer Advocate could be assigned this
function.
(4) The IRS should be encouraged to utilize ``real-time''
feedback tools when interacting with taxpayers. One such tool
is the ``regulatory sandbox,'' which allows regulators and
regulated entities to engage in a structured, productive
environment focused on problem solving rather than posturing. A
regulatory sandbox model could be adapted to the purpose of
engaging in exercises over IRA resource allocation and
prioritization. As an example, experts from private sector
could be invited to design different hierarchies for various
parts of the IT infrastructure, positing the ``what ifs'' from
one approach to modernization versus another. My colleague Ryan
Nabil has written extensively about regulatory sandboxes in the
United States and abroad and would be delighted to discuss them
with the committee further.
Question. What recommendations would you make to Congress in how it
should oversee IRS hiring and personnel practices as IRA funding is
implemented?
Answer. Most of the recommendations I would make in this area
pertain to IRS hiring and personnel practices in general, not only
those confined to IRA funding. Perhaps the only difference between
``normal'' IRS hiring and IRA-related hiring is a sense of urgency and
pressure associated with the need to meet the revenue ``score''
associated with the IRA resources. This is a grim reminder of the need
to avoid the temptation to tie personnel decisions to specific
collection goals. During the 1980s and 1990s, NTU was among many
organizations that worked with Congress to end the IRS managerial
culture that was seen as providing rewards and promotions to personnel
based on their ability to obtain the most money from taxpayers in
enforcement actions. Congress and the IRS must take every step to
ensure that this culture never takes root again. NTU would gladly
provide archival documents about the history of this struggle.
On a more practical level, Congress could request that GAO conduct
a survey of available literature and studies on the following:
(1) Private firms involved in financial transactions (e.g.,
loan repayments and overdue credit card payments) on how their
employees are trained to respect consumer rights and comply
with the law.
(2) How the most successful law enforcement and customer
service agencies at the State and Federal levels have met their
recruiting goals without sacrificing quality.
(3) How tax agencies abroad have restructured their workforces
to not only be more efficient, but also to foster trust with
the taxpaying population.
Of particular assistance with (3) would be the Center for Taxpayer
Rights, established by former National Taxpayer Advocate Nina Olson.
The Center has access to many sources of information on hiring and
personnel practices that could benefit the IRS and the taxpayers it is
meant to serve. Another suggestion regarding (2) would be to consult
with ETAAC member Mark Godfrey, who was part of the Missouri Department
of Revenue's effort to bring a more taxpayer-centric culture to the
workforce (including an objective of a 100-percent answer rate for
taxpayer calls received by the agency).
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
In recent months, this committee has held three hearings, two with
Commissioner Werfel and one with Secretary Yellen, in which Republicans
have attacked the Inflation Reduction Act funding for the IRS.
The first bill that House Republicans passed in 2023 repealed the
bulk of that funding. Repeal is a centerpiece of Speaker McCarthy's
default plan, which would also destroy 780,000 jobs and increase the
odds of a recession.
By all outward appearances, repealing this funding is the
Republicans' top economic priority. That's why the Finance Committee is
meeting this morning--to break down, point by point, all the harm
repealing it would do, especially as a part of the overall McCarthy
plan.
First, I want to focus on the major setback for criminal law
enforcement. As a way to frighten typical taxpayers, Republicans have
fabricated a whole lot of stories about 87,000 armed agents busting
down the doors at local businesses and people's homes. It's nonsense.
The truth is, the IRS has a modest but critically important team of
law enforcement personnel. They work on busting human trafficking
rings, drug cartels, and enablers of child exploitation. They root out
individuals and groups financing terrorists. They help crack down on
criminal tax fraud and evasion, including the kind of evasion the
Finance Committee identified with our 2-year investigation of how Swiss
bank Credit Suisse enabled a group of dual U.S. and foreign citizens to
cheat on paying U.S. taxes.
At this moment, the IRS Criminal Investigation division is working
with partners in Ukraine to hunt down crooks who are evading sanctions
on Russia.
And recently, the Criminal Investigation division collaborated with
the FBI, the Department of Justice, and law enforcement partners around
the world on the largest fentanyl distribution takedown in history. It
resulted in hundreds of arrests and the seizure of $54 million and 850
kilograms of drugs, including the equivalent of millions of lethal
doses of fentanyl.
Republican cuts reduced the workforce of Criminal Investigation
special agents by 26 percent. Democrats passed IRA funding to help
rebuild it, but Republicans now want to repeal that funding. Others say
the funding ought to be targeted elsewhere. The question is, if you
want to cut this enforcement spending, which criminal activity do you
propose letting slide? Drug rings? Money laundering? Sex trafficking
and child abuse?
Yesterday, the committee received a letter from the Federal Law
Enforcement Officers Association opposing the Republican plan. This is
a group representing tens of thousands of Federal law enforcement
officers from across dozens of agencies. Without objection, I'll enter
that letter into the hearing record.
Second issue: coming off the smoothest tax filing season in many
years, the McCarthy repeal plan would once again clobber taxpayer
service and force Americans to spend hours waiting on hold with the
IRS.
House Republicans are hiding the ball on this issue. The McCarthy
plan would leave the temporary IRA funding for taxpayer service in
place, and Republicans will insist that's proof they're interested in
maintaining better service.
Here's what they're not telling the American people: the McCarthy
plan would also hit the IRS with across-the-board budget cuts just like
the ones that steadily wrecked taxpayer service before Democrats were
able to start fixing it last year. Nobody is asking for a return to 10-
or 15-percent call response rates at the IRS.
Third, the McCarthy plan to repeal the IRS funding would lead to a
$120-billion increase in the deficit. How would his plan offset that
deficit increase? By kicking people off their health insurance,
increasing child hunger, worsening education, and weakening border
security, among many other examples.
With all that said, if you're looking for the big winners of the
McCarthy IRS defunding plan, it's billionaires and corporations who
cheat on their taxes. The Inflation Reduction Act funding for the IRS
was designed to make sure they pay what they owe. Repealing that
funding is a $191-billion giveaway to wealthy tax cheats.
The effect of Republican IRS cuts has been clear. From 2010 to
2017, when Republicans cut the IRS most aggressively, audit rates for
millionaires went down 77 percent; for large corporations, down 44
percent; for complex partnerships, down 80 percent. Performing those
audits takes a lot of hard work by highly skilled staff, and the IRS
has lost 40 percent of those agents.
Republican cuts shifted the burden of tax enforcement onto working
people. Auditing them was easy. An audit of a simple individual
taxpayer's return takes 5 hours on average. Auditing a higher-income
tax cheat takes an average of 250 hours. Corporate audits and audits of
large, complex partnerships can take even longer, sometimes several
years. And they require large teams with a lot of expertise. Republican
budget cuts systematically dismantled much of that expertise in the
previous decade, and the McCarthy plan would decimate it going forward.
The bottom line is, the McCarthy plan would lead to more tax
evasion by the rich, worse taxpayer service for law-abiding Americans,
and fewer prosecutions of drug cartel members, sex criminals, sanctions
evaders, and money launderers. Obviously, this cannot pass.
So there's a lot for us to discuss today. I'm looking forward to
hearing from our witnesses.
______
Federal Law Enforcement Officers Association
1101 Connecticut Ave., NW, Suite 1000
Washington, DC 20036
Phone: 202-293-1550
www.fleoa.org
May 15, 2023
Chairman Ron Wyden
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510
Ranking Member Mike Crapo
Committee on Finance
Washington, DC 20510
RE: Funding Federal Law Enforcement
Dear Chairman Wyden and Ranking Member Crapo:
The Federal Law Enforcement Officers Association (FLEOA)--the nation's
largest non-partisan professional association, representing more than
32,000 active and retired federal law enforcement officers from over 65
federal agencies--applauds your efforts to prioritize and support
funding for the Criminal Investigation Division (CI) of the IRS. FLEOA
opposes any efforts or legislation that cuts funding for law
enforcement, including H.R. 2811--Limit, Save, Grow Act of 2023.
As the 6th largest federal law enforcement agency, CI serves a crucial
role in supporting national law enforcement priorities and high-impact
financial investigations. From protecting Americans against stolen
identity refund fraud (SIRF) and cybercrime to dismantling large scale
transnational organized crime syndicates, major drug cartels,
international money laundering schemes, and having sole authority to
investigate federal tax crimes, CI is an important national law
enforcement asset.
CI plays a key role in the Department of Justice's efforts to
investigate and prosecute complex financial crimes and criminal
activity where money is a motivating factor. This includes priority
multi-agency task forces focused on thwarting the trafficking of
fentanyl, narcotics and the fight against global terrorism. Just a few
weeks ago, CI was the lead investigative agency in the largest
international fentanyl/opioid seizure in U.S. history. This CI led
operation took down a massive drug trafficking operation that led to
the arrest of 288 dangerous criminals and seized an astounding 64kg of
fentanyl and fentanyl-laced opioids. CI also assists in the
identification and seizure of sanctioned Russian oligarch assets. CI's
efforts play a pivotal role in protecting Americans from dangerous
criminal networks.
CI is so prolific at conducting these high-impact financial
investigations that they are regularly the largest contributor to the
Treasury Forfeiture Fund, which is comprised of non-tax criminally
derived assets seized by Treasury and Homeland Security law enforcement
agencies. In addition to depriving criminal organizations of their
illicit proceeds, where possible, funds are returned to victims of
financial crimes.
Since 2010, CI's staffing has experienced an alarming decline. In 2010
CI had approximately 4,000 employees of which about 2,760 were special
agents. At the close of 2022, CI had only 3,000 employees of which
about 2,075 were special agents. Historically, CI has been second only
to the FBI in bringing white-collar criminal prosecutions.
Unsurprisingly, CI's crushing drop in staffing directly correlates to a
steady decline in white-collar crime prosecutions by DOJ over the same
12-year period. Any reduction in CI funding will undermine critical
efforts to attack the distribution of fentanyl and other deadly
narcotics that are disproportionately impacting America's youth.
We urge you to continue prioritizing the financial investigative
mission of CI and applaud your recent efforts to hold hearings and
initiate discussions on the crucial importance of proper CI funding.
Our membership, which includes CI Special Agents in Charge and Senior
Executives, welcome the opportunity to work with you on this and other
important issues related to CI and their ability to protect and serve
America.
Sincerely,
Larry Cosme
National President
Federal Law Enforcement Officers Association
______
Communication
----------
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
[email protected]
Statement of Michael Bindner
Chairman Wyden and Ranking Crapo, thank you for the opportunity to
address this issue.
It seems like we were just talking about this as recently as April 19.
In our comments, we will address what the increased IRS funding really
pays for and why it is important and how the Majority could adopt the
Fair Tax proposal into several consumption taxes (rather than a single
tax) and actually defund the IRS.
Anyone who has ever made a mistake on their taxes (like omitting a
child's Social Security number) or has been in arrears and needed a
payment plan knows what it can be like to reach an actual IRS agent.
While the agency could certainly leverage its resources by contracting
out customer service telecommunications, there are some items, like
payment negotiations, that must be handled with agency personnel.
It is reported that during the pandemic and its recovery period, when
people had questions on how to start their enhanced Child Tax Credit
payments--or had actual difficulty filing for them--that it was
impossible to get an agent on the phone. Both the pandemic and
underfunding were equally responsible. The additional money for IRS
fixed this.
Given the number of poor people in the states sending Republicans to
Congress, it makes no sense to claw this money back. Even donors want
to get the IRS on the phone, so playing politics with customer service
makes no sense. Lincoln had something to say about fooling some of the
people some of the time. Some of these people may even be less informed
members of the Senate minority or their staffs.
The repeal of Roe v. Wade makes returning to the Pandemic-era Child Tax
Credit essential. Increased funding is included in the President's
Budget and will eventually pass (once Special Counsel Smith has
examined what was known by the House Freedom Caucus and when they knew
it). The question is, how do we want these funds to be distributed.
Should the IRS be a direct social services provider? As we have stated
before. . . .
. . . to end the ``stink of welfare'' that Senator Manchin so
objects to, CTC payments should be included with wages for all
employees--not just those with three or more children. They
should also be distributed through other federal and state
assistance programs--some of which can be reduced to do so.
For middle-income taxpayers whose increased credits are less
than their annual tax obligation, a simple change in
withholding tables is adequate. Procedures are already in place
to deliver refundable credits to larger families. For the
coming year, they merely need to be expanded to all families
with children.
Employers can work with their bankers to increase funds for
payroll throughout the year while requiring less money for
their quarterly tax payments (or estimated taxes) to the IRS.
The main issue is working out those situations where employers
owe less than they pay out. This is especially true for labor
intensive industries and even more so for low wage employers.
A higher minimum wage would make negative quarterly tax bills
less likely. Indeed, no one should have to subsist mainly on
their child tax payments.
As usual, we have attached the latest version of our tax reform plan,
with a separate attachment on how implementation of this plan would
affect IRS manpower. The answer is that the change would be drastic. It
would also allow the Committee to focus more on how social welfare is
being delivered in general, as well as eliminating current roadblocks
to promptly filing for Social Security Disability Income.
Let me relate the various provisions to the Fair Tax (and how to modify
it).
The closest tax to the Fair Tax we propose is the Invoice Value-Added
Tax. It would fund discretionary government (and, if a constitutional
amendment allowed uneven excise taxes), this could be done on a
regional basis. Those regions who want to have a lower rate would fund
less government. Those who want more projects and military bases would
pass a higher tax.
This tax would also replace the employer contribution to Social
Security, but to make revenue accumulation look more like payment
distribution, this revenue would be credited equally to all workers who
accumulate the minimum number of credits in a quarter. The employee
contribution would remain as it is. The check goes to the Department of
the Treasury in either instance and the Social Security Administration
will record the proceeds in exactly the same way.
A main objection to the Fair Tax is that it can be gamed by claiming
everything you buy is wholesale. This is a big hole, a hole that value-
added taxes fix. There is already a value-added tax on the books,
although it is intergovernmental and inadequate. Businesses who collect
sales taxes can already deduct them from their business income. This
puts the national government in the position of subsidizing state and
local sales taxes. The Fair Tax could include this provision for a
federal sales tax as well.
The inadequacy comes from the fact that taxes paid are a dedication
rather than a credit. This can, indeed this must be fixed--whether the
Fair Tax is enacted or not. Any federal tax paid must be fully credited
at the federal level, with state taxes paid credited at the state
level. These tax payments should still be used to adjust income. For
example, state business income would be reduced by federal Fair Tax or
VAT while federal income continues to be adjusted in the current
manner.
The other issue with the Fair Tax is that payments to families would be
shifted from tax credits to payments from the Treasury (regardless of
whether Social Security or the IRS distributes them). Payments above
the ``prebate'' level would be shifted to state social welfare agencies
through either new income stabilization programs or by putting most
American families on the Food Stamp rolls.
The amount of these subsidies is uneven. Minor children of disabled or
retired parents get various benefit levels and the Earned Income Tax
Credit and Child Tax Credit phase in and out at various income levels.
A universal child credit added to wages or income support programs
(including OASDI, Unemployment Insurance and Pell Grants) would unravel
this mess and allow all but the richest families to avoid filing taxes
at all (unless they were filing separately as a business owner). For
workers, these payments would be distributed with wages as an offset to
a second consumption tax--what we call a subtraction VAT, which is
essentially a net business receipts tax.
Health-care subsidies would also be added to this tax. Firms who
provide insurance coverage would be able to credit a portion of their
premiums as a credit against this tax. The proceeds would fund any
subsidized public option, which would replace Medicaid for the working
poor. Medicaid for nursing homes would be funded by the Invoice VAT.
States would also use a subtraction VAT as a vehicle for additional
income subsidies for high-cost states (or urban areas), as well as
using the tax to fund other social services (again, with offsets) if
employers provide these services--such as tuition assistance for
workers and their families--as well as any other social welfare
spending (for example, mental health care and housing) that should be
funded by employers rather than through property or sales taxes.
If the Child Tax Credit is adequate to meet the needs of most families,
rebates for Fair Taxes and Carbon taxes would not be necessary. Instead
of limiting Child Tax Credit payments to families based on higher (or
lower) incomes, a subtraction VAT surtax would be levied on cash
payments to workers or investors in excess of the Social Security
Employee Payroll tax cap, with graduated rates for higher incomes. The
firm would pay these amounts, not the individual employees, with
individual taxation paid on cash salary, dividend or interest income
above approximately $400,000 per year--again, with graduated rates of
between 6.5% to 26% (more or less).
Subtraction VAT would entirely replace Corporate Income Taxation at all
levels. The surtax for cash payments to higher income investors or
workers would replace most collections of personal income tax and would
assure parity between the tax treatments of labor and capital. There
would also be no industry based tax subsidies, save for the deduction
of all material costs (possibly including equipment, unless the
decision is made to maintain depreciation rules).
Capital gains and estate (or death) taxes would be repealed. Stocks
could be considered a consumer good, with a Fair Tax payment for each
transaction, or could be levied as an asset value-added tax. For those
who don't know economics, and for some who do, investment in secondary
markets does not add to Gross Domestic Product. It is savings--or
rather--it is gambling. In corporate bankruptcy, stock is worthless.
Like the rest of the tax system, the capital gains and estate taxes are
a maze of rates depending on income and time the asset is held. A
single rate would be instituted instead for all short and long term
investments. Cash payments in inheritance would not be taxed until they
are spent or reinvested. This allows for closing all the loopholes in
the system, from life insurance to avoid taxation to borrowing from
stock to using business losses to reduce taxes on wages and salaries.
Thank you, again, for the opportunity to add our comments to the
debate. Please contact us if we can be of any assistance or contribute
direct testimony.
Attachment One--Tax Reform, Center for Fiscal Equity, March 24, 2023
Synergy: The President's Budget for 2024 proposes a 25% minimum tax on
high incomes. Because most high income households make their money on
capital gains, rather than salaries, an asset value-added tax replacing
capital gains taxes (both long- and short-term) would be set to that
rate. The top rate for a subtraction VAT surtax on high incomes (wages,
dividends and interest paid) would be set to 25%, as would the top rate
for income surtaxes paid by very high-income earners. Surtaxes
collected by businesses would begin for any individual payee receiving
$75,000 from any source at a 6.25% rate and top out at 25% at all such
income over $375,000. At $450,000, individuals would pay an additional
6.25% on the next $75,000 with brackets increasing until a top rate of
25% on income over $750,000. This structure assures that no one games
the system by changing how income is earned to lower their tax burden.
Individual payroll taxes. A floor of $20,000 would be instituted for
paying these taxes, with a ceiling of $75,000. This lower ceiling
reduces the amount of benefits received in retirement for higher-income
individuals. The logic of the $20,000 floor reflects full time work at
a $10 per hour minimum wage offered by the Republican caucus in
response to proposals for a $15 wage. The majority needs to take the
deal. Doing so in relation to a floor on contributions makes adopting
the minimum wage germane in the Senate for purposes of Reconciliation.
The rate would be set at 6.25%.
Employer payroll taxes. Unless taxes are diverted to a personal
retirement account holding voting and preferred stock in the employer,
the employer levy would be replaced by a goods and receipts tax of
6.25%. Every worker who meets a minimum hour threshold would be
credited for having paid into the system, regardless of wage level. All
employees would be credited on an equal dollar basis, rather than as a
match to their individual payroll tax. The tax rate would be adjusted
to assure adequacy of benefits for all program beneficiaries.
High-income Surtaxes. As above, taxes would be collected on all
individual income taxes from salaries, income and dividends, which
exclude business taxes filed separately, starting at $400,00 per year.
This tax will fund net interest on the debt (which will no longer be
rolled over into new borrowing), redemption of the Social Security
Trust Fund, strategic, sea and non-continental U.S. military
deployments, veterans' health benefits as the result of battlefield
injuries, including mental health and addiction and eventual debt
reduction.
Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes
and the estate tax. It will apply to asset sales, exercised options,
inherited and gifted assets and the profits from short sales. Tax
payments for option exercises, IPOs, inherited, gifted and donated
assets will be marked to market, with prior tax payments for that asset
eliminated so that the seller gets no benefit from them. In this
perspective, it is the owner's increase in value that is taxed. As with
any sale of liquid or real assets, sales to a qualified broad-based
Employee Stock Ownership Plan will be tax-free. These taxes will fund
the same spending items as high-income and subtraction VAT surtaxes.
There will be no requirement to hold assets for a year to use this
rate. This also implies that this tax will be levied on all eligible
transactions.
The 3.8% ACA-SM tax will be repealed as a separate tax, with health-
care funding coming through a subtraction value-added tax levied on all
employment and other gross profit. The 25% rate is meant to be a
permanent compromise, as above. Any changes to this rate would be used
to adjust subtraction VAT surtax and high-
income surtax rates accordingly. This rate would be negotiated on a
world-wide basis to prevent venue seeking for stock trading.
Subtraction Value-Added Tax (S-VAT). Corporate income taxes and
collection of business and farm income taxes will be replaced by this
tax, which is an employer paid Net Business Receipts Tax. S-VAT is a
vehicle for tax benefits, including
Health insurance or direct care, including veterans' health care
for non-
battlefield injuries and long-term care.
Employer paid educational costs in lieu of taxes are provided as
either
employee-directed contributions to the public or private unionized
school of their choice or direct tuition payments for employee children
or for workers (including ESL and remedial skills). Wages will be paid
to students to meet opportunity costs.
Most importantly, a refundable Child Tax Credit at median income
levels (with inflation adjustments) distributed with pay.
Subsistence-level benefits force the poor into servile labor. Wages and
benefits must be high enough to provide justice and human dignity. This
allows the ending of state administered subsidy programs and
discourages abortions, and as such enactment must be scored as a must
pass in voting rankings by pro-life organizations (and feminist
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border-adjustable.
As above, S-VAT surtaxes are collected on all income distributed over
$75,000, with a beginning rate of 6.25%. replace income tax levies
collected on the first surtaxes in the same range. Some will use
corporations to avoid these taxes, but that corporation would then pay
all invoice and subtraction VAT payments (which would distribute tax
benefits). Distributions from such corporations will be considered
salary, not dividends.
Invoice Value-Added Tax (I-VAT). Border-adjustable taxes will appear on
purchase invoices. The rate varies according to what is being financed.
If Medicare for All does not contain offsets for employers who fund
their own medical personnel or for personal retirement accounts, both
of which would otherwise be funded by an S-VAT, then they would be
funded by the I-VAT to take advantage of border adjustability.
I-VAT forces everyone, from the working poor to the beneficiaries of
inherited wealth, to pay taxes and share in the cost of government. As
part of enactment, gross wages will be reduced to take into account the
shift to S-VAT and I-VAT, however net income will be increased by the
same percentage as the I-VAT. Inherited assets will be taxed under A-
VAT when sold. Any inherited cash, or funds borrowed against the value
of shares, will face the I-VAT when sold or the A-VAT if invested.
I-VAT will fund domestic discretionary spending, equal dollar employer
OASI contributions, and non-nuclear, non-deployed military spending,
possibly on a regional basis. Regional I-VAT would both require a
constitutional amendment to change the requirement that all excises be
national and to discourage unnecessary spending, especially when
allocated for electoral reasons rather than program needs. The latter
could also be funded by the asset VAT (decreasing the rate by from
19.25% to 13%).
Carbon Added Tax (C-AT). A Carbon tax with receipt visibility, which
allows comparison shopping based on carbon content, even if it means a
more expensive item with lower carbon is purchased. C-AT would also
replace fuel taxes. It will fund transportation costs, including mass
transit, and research into alternative fuels. This tax would not be
border adjustable unless it is in other nations, however in this case
the imposition of this tax at the border will be noted, with the U.S.
tax applied to the overseas base.
Attachment Two--Tax Administration, Treasury Budget, February 12, 2020
Shifting to a single system for all business taxation, particularly
enacting invoice value-added taxes to collect revenue and employer-
based subtraction value-added taxes to distribute benefits to workers
will end the need for filing for most, if not all, households. Any
remaining high-salary surtax would be free of any deductions and
credits and could as easily be collected by enacting higher tiers to a
subtraction VAT.
Subtraction VAT collection will closely duplicate the collection of
payroll and income taxes--as well as employment taxes--but without
households having to file an annual reconciliation except to verify the
number of dependents receiving benefits.
Tax reform will simplify tax administration on all levels. Firms will
submit electronic receipts for I-VAT and Carbon Added Tax (C-AT)
credit, leaving a compliance trail. S-VAT payments to providers, wages
and child credits to verify that what is paid and what is claimed match
and that children are not double credited from separate employers.
A-VAT transactions are recorded by brokers, employers for option
exercise and closing agents for real property. With ADP, reporting
burdens are equal to those in any VAT system for I-VAT and A-VAT and
current payroll and income tax reporting by employers.
Employees with children will annually verify information provided by
employers and IRS, responding by a postcard if reports do not match,
triggering collection actions. The cliche will thus be made real.
High-salary employees who use corporations to reduce salary surtax and
pay I-VAT and S-VAT for personal staff. Distributions from such
corporations to owners are considered salary, not dividends.
Transaction based A-VAT payments end the complexity and tax avoidance
experienced with income tax collection. Tax units with income under
$84,000 or only one employer need not file high salary surtax returns.
Separate gift and inheritance tax returns will no longer be required.
State governments will collect federal and state I-VAT, C-AT, S-VAT
payments, audit collection systems, real property A-VAT and conduct
enforcement actions. IRS collects individual payroll and salary surtax
payments, performs electronic data matching and receive payments and
ADP data from states. SEC collects A-VAT receipts.
I-VAT gives all citizens the responsibility to fund the government. C-
AT invoices encourage lower carbon consumption, mass transit, research
and infrastructure development. A-VAT taxation will slow market
volatility and encourage employee ownership, while preserving family
businesses and farms. Very little IRS Administration will be required
once reform is fully implemented. All IRS employees could fit in a
bathtub with room for Grover Norquist.
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