Wealthy Americans dodged getting hit by tax increases in the Democrats’ economic package, but they likely will face a much better-funded Internal Revenue Service equipped with new auditors and technology to uncover tax avoidance.
Top-earning Americans should be prepared for audit levels they haven’t seen in decades as the agency prepares to train an expanded workforce that specializes in complex financial dealings, including cryptocurrencies and offshore investments.
The tax and climate bill that the Senate is poised to pass as soon as this weekend includes $80 billion for the IRS over the next decade, a massive influx of cash for the agency that has faced budget cuts and declines in customer service and audit levels over the past decade. Democrats supporting the bill hope the bill will reverse those slides.
The non-partisan Congressional Budget Office projects that the $80 billion investment will yield an additional $204 billion in tax collection over the next decade. But other estimates, including some internal Treasury figures, suggest it could be much higher.
Treasury has projected that the additional IRS enforcement could be almost twice what CBO predicts — about $400 billion over 10 years.
Academic research has also found that higher audit rates increase tax revenue in two ways, directly from the money collected from tax return examinations, as well as higher voluntarily compliance after a taxpayer is audited and from others who fear higher risk of IRS scrutiny.
Lawrence Summers, who served as Treasury Secretary under former President Bill Clinton, said the CBO’s figures are too conservative and that the IRS could collect far more from high-earning Americans and corporations.
“If this program is really implemented, instead of the $200 billion that the CBO estimates, I think the benefit could be $500 billion or even possibly, if they do a great job, $1 trillion,” he said in a interview with Bloomberg Television last week. “So I’m pretty optimistic about the fiscal potential here if the administration really steps up.”
The IRS has a lot of ground to make up on audits. The agency scaled back audits of all taxpayers between 2010 and 2019, with the total audit rate falling to 0.25% from 0.9%.