The U.S. government could take in $1.2 trillion in additional tax revenue over a decade without raising marginal rates by aggressively auditing wealthy individuals and corporations, according to a House Democrat’s new bill.
Representative Ro Khanna of California is pushing legislation that would require a major boost in audits by the Internal Revenue Service, along with increased penalties for underpaying taxes. The legislation would require the IRS to annually audit 95% of companies with at least $20 billion in assets and 50% of individuals earning at least $10 million.
Those levels would substantially heighten the likelihood of getting audited. In 2018, just 3.6% of companies with at least $20 billion in assets were audited and 0.03% of individual returns with at least $10 million in income were examined, according to IRS statistics.
“We know our tax system is broken, and it’s long past time we start fixing it,” Khanna said in a statement. “Wall Street has been able to act like high-rolling gamblers with almost zero consequences for far too long. Right now, the wealthiest 1% are responsible for roughly 70% of the ‘tax gap’—the difference between taxes owed and taxes paid. It’s time every American pay their fair share.”
Khanna’s proposal showcases how progressives are mobilizing to pursue their agenda of addressing wealth and income inequality now that Democrats have unified control of Congress along with the White House. An approach focused on enforcement could garner broader support than outright tax hikes, which Republicans would seek to block.
Biden’s Stance
President Joe Biden has also said he wants to expand the IRS’s audit capabilities as part of a broader tax overhaul. The IRS failed to collect about $381 billion in total—or about 14% of the amount due—over a three-year period through 2013, according to the agency’s most recent estimates.
The legislation would also require the IRS to audit one-third of those taxpayers earning $5 million to $10 million and one-fifth of those earning $1 million to $5 million. It would also require the agency to examine 40% of estate-tax returns worth more than $10 million.
Taxpayers could also face fines as high as 40% for underpaying their tax bills. Pass-through business owners, such as those earning money through a limited-liability company or partnership, would also have to file more paperwork reporting the source of their income.
The legislation would give the IRS $100 billion over a decade to hire staff and expand the audit program, increase spending on taxpayer services and to improve computer systems to better detect fraud. That funding would come close to nearly doubling the agency’s annual budget—which is $12.1 billion this year.
Existing Efforts
The IRS has already begun expanding some enforcement efforts under Commissioner Chuck Rettig. The agency has focused on targeting abusive transactions tied to cryptocurrency and land-conservation deals. Agency officials said last year they plan to increase audits on small businesses and investors by 50% in 2021.
Under procedures that Congress approved in 2015, the IRS can more easily collect any underpaid taxes it finds during the audits of many small businesses. Instead of having to track down each investor, the IRS can now collect the money from the partnership itself. Still, the agency said it needs more money to greatly expand enforcement efforts, which have declined in recent years as lawmakers cut the IRS’s budget.
The Treasury Department says the IRS can collect an additional $5 in tax revenue with every additional $1 in funding Congress appropriates to the IRS. Khanna’s bill would also raise money from penalties.
Estimates about the return on audit spending vary greatly. Former Treasury Secretary Larry Summers and University of Pennsylvania law professor Natasha Sarin have argued that increasing the IRS budget over the next 10 years by $100 billion would raise $1.15 trillion. The Congressional Budget Office has a more modest calculation, suggesting the IRS could collect up to $3 for every additional $1 in funding.
This article was provided by Bloomberg News.
