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With Tax Gap Ballooning to $7 Trillion, Experts Call for Increased IRS Budget and Staff

by
Steward Financial
on
6/27/2021
With Tax Gap Ballooning to $7 Trillion, Experts Call for Increased IRS Budget and Staff

Partisan bickering over tax rates is a constant, but when five of the nation’s former Treasury Secretaries agree on something, it’s time to take notice. In response to reports of enormous disparities between what taxes owed and taxes collected, Lawrence Summers, Robert Rubin, Henry Paulson, Jacob Lew, and Timothy Geithner all called for Congress to approve President Joseph R. Biden’s proposed budget to beef up the IRS.

One day later, Deputy Assistant Secretary Mark Mazur told lawmakers that he expects the shortfall in tax collection to reach $7 trillion over the next decade.

The 2022 fiscal budget proposed by the Biden administration includes almost $80 billion dedicated to allowing the Internal Revenue Service to bulk up staffing that has been depleted for years, as well as to pay for state-of-the-art technology and improved abilities to collect essential income information via third parties.

The monies would provide a funding stream over several years and would raise an estimated $700 billion in additional tax revenue according to estimates provided by the Treasury’s Office of Tax Analysis.

In response to the budget, the five former cabinet members co-authored a New York Times op-ed that urged Congress to sign off on the proposal. The group wrote,

“We are convinced that better information-reporting requirements can be designed that will permit significant increases in revenue collection without imposing any burden at all on taxpayers and imposing no significant increase in regulatory burdens across the economy. Reasonable people can disagree on the magnitude of particular tax rate increases, but on this issue, all should agree, including members of Congress of both parties: Giving the I.R.S. the tools it needs to improve compliance will raise significant revenue and create a fairer, more efficient system of tax administration.”

A day later, Mazur told Congress that in 2019 the gross tax gap had been approximately $580 billion, and that in coming years it would get worse without action being taken. “Over the coming decade, the gross tax gap is projected to total approximately $7 trillion, roughly 15 percent of all owed taxes,” he said. “A larger tax gap generates the following results: higher tax rates elsewhere in the system, lower revenues to fund the nation’s fiscal priorities, or higher budget deficits and larger amounts of federal debt. Extensive and persistent non-compliance also undermines confidence in the fairness of our tax system.” 

Rather than blaming the gap on tax rates, he indicated that insufficient funding for the IRS had become a persistent problem with a 20% drop in the agency’s budget over the last ten years resulting in decreased numbers of audits being conducted and increased layoffs of the staff integral to ensuring compliance, including taxpayer service and enforcement employees. The staggering statistics – 33,378 full-time positions lost between 2010 and 2020, and tax audits dropping by 72% despite the number of millionaires nearly doubling since 2012 – made the issue clear, particularly considering repeated IRS warnings that have been issued over the last few years.

This issue is sure to generate more interest and discussions in the coming months, so stay tuned to see what happens.

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Steward Financial

Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

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