I enthusiastically applaud President Biden’s proposal to increase the IRS’s budget by $1.2 billion, or more than 10 percent over this year’s budget. In fact, call me a huge cheerleader for this proposal, that further calls for annual increases for the next decade. Most of the money will go toward increasing enforcement by hiring more auditors and collectors, and improving the IRS’s grossly-outdated computers. Of course, goodness knows what will come of this proposal in our seemingly-perpetually-gridlocked Congress. Since I interact daily with the IRS, I think I’m both entitled and qualified to comment on this topic. I have four main comments.
Uncollected Taxes
I see the IRS not working hard enough to collect taxes every day. My current client portfolio contains half-a-dozen clients, with tax debt of $500,000 or more, who have paid nothing and have heard nothing from the IRS in at least five years. And that’s not counting all the clients I have with far smaller tax debts where the IRS has been too understaffed to pay then any attention for several years – I have dozens of those. Just this month alone, four clients had their tax liability wiped out because the IRS reached the 10 year window in which it can legally collect back taxes. One of those clients owed more than $1 million (in payroll taxes). My client could never have paid more than a small fraction of his liability, but he could have paid something. Yes, many of my clients are better off when their tax debt disappears, but the US government and all American taxpayers are poorer because the IRS lacks the resources to enforce tax laws.
Absurdly-Slow Response Times
While some clients are helped by the IRS’s inability to fully enforce tax laws, I have more clients who are hurt by it. Many of my clients have been audited, found to owe, and now want to set up an installment agreement or an offer in compromise. But many of them have to wait for years for the IRS to complete the necessary paperwork. In fact, in the past few years, I’ve been increasingly telling clients to act as if an installment agreement was approved and just start making payments. With many IRS agents, it often takes 2-6 months for me to get a reply to a simple question on a client’s file. I am not kidding. Check out my Tales from the Tax Troll Trenches. C’mon — this is absurd. Every American is touched by the IRS – can we at least get an IRS agent with less than a several hour wait when we call?
Minimal Oversight of Questionable Tax Shelters
I also see that the IRS is not working hard enough to audit questionable transactions. I had a client invest in a very sketchy captive insurance program (a complicated tax evasion scheme). I advised him against it, but he went ahead anyway and kept me on retainer to defend him when the IRS audited him. He filed an amended return to claim the benefits of this transaction, and the amended return flagged the transaction as a potentially abusive transaction (as the law required). The statute of limitation for opening the audit is now long gone. The IRS had the potential to assess another six figures of tax debt here and lost it by just not showing up. I’m not the only one steamed about all the tax cheats that get away with it these days: check out this rant by four former Treasury Secretaries (the IRS is located in the Treasury Department).
Reducing Tax Compliance
The US has a voluntary compliance rate of approximately 84 percent (84 percent of people filing tax returns report all their income and pay the tax thereon). This is high compared to other, advanced industrialized countries. But what happens if Americans start thinking there’s no consequence to evading taxes? What if paying taxes becomes something that only losers do? Especially when the likes of Bezos and other American billionaires pay less in taxes than the average wage-earner. Why should I be a chump and pay my taxes if I see my neighbors get away with not paying their taxes? Am I overreacting to the problem of the tax gap? Read virtually the same opinion from FIVE former IRS Commissioners here.
The administration estimates that it will collect another $4 for every $1 increased in the IRS’s budget. I think that IRS funding would have an even greater multiplier effect. But there’s lots of disagreement on how much additional revenue the budget increase will net (see also here) — sensibly so, since it’s so difficult to predict accurately. Whatever the effect, more funding will help our government, our society, and many of my clients.
So watch me put up a cheerleader pom-pom in support of Biden’s attempt to increase IRS funding.
June 24, 2021