June 11, 2021
Ways & Means subpanels hold tax gap hearing
During the June 10 House Ways & Means Select Revenue Measures and Oversight subcommittees’ joint hearing on the tax gap, Democrats voiced support for President Biden’s budget proposals for more funding for IRS enforcement and technology alongside a proposal to have financial institutions perform additional reporting on inflows to and outflows from financial accounts, saying it would increase compliance. Similar to a Senate Finance hearing on Tuesday, Republicans expressed concerns over the privacy aspects of the proposal, and additionally said a report this week based on leaked information about high-income and high-profile taxpayers demonstrates the dangers of providing more information to the IRS.
Witnesses during a first panel were Mark Mazur, Deputy Assistant Secretary for Tax Policy, U.S. Department of Treasury, and Doug O’Donnell, Deputy Commissioner for Services and Enforcement, Internal Revenue Service. Mazur said of information reporting, “When the IRS can verify taxpayer filings with third-party information reports, such as the W-2 forms submitted by employers to report wages, income reporting compliance rates exceed 95 percent. Without third-party reporting, income reporting compliance rates can fall below 50 percent.”
O’Donnell touched on personnel challenges, saying budget cuts over the past decade have resulted in a 15 percent decline in the number of full-time employees since FY 2010 and an agency that lacks the capacity to address sophisticated tax evasion efforts. “The effect of personnel lost is most visible in enforcement activities. Among the 33,378 full-time personnel lost between FY 2010 and FY 2020, more than 13,388 were enforcement personnel,” he said. “These losses included revenue agents and revenue officers who audit tax returns and perform collection activities, as well as special agents who investigate tax-related crimes and other issues.”
During questioning from SRM Chairman Mike Thompson (D-CA), O’Donnell made points similar to those Commissioner Charles Rettig made to the Senate Finance Committee June 8, including that there is a taxpayer-positive aspect to the increased reporting because the better information IRS has regarding taxpayer activities, the better chance the agency will spot instances in which taxpayers are fully compliant and avoid audit. Similarly, Mazur said that if $25,000 in inflows and $25,000 in outflows are reported, there is no need to audit; if there is a disparity in the amounts, that is something that needs to be looked at.
O’Donnell also, like Rettig, said that with other information reporting regimes like FATCA, IRS was not fully funded to analyze the information and not capable of taking full advantage of the information made available, and so accompanying technology resources would be required this time around.
Rep. Tom Rice (R-SC) expressed concern about the privacy aspects of the Administration’s proposal, especially with IRS “reaching into peoples’ bank accounts” and additional financial reporting, amid the threat of leaks to the press like those demonstrated this week. Mazur, who during the hearing asserted that leaks from the IRS are wrong and deserving of consequences, said increasing information reporting will help voluntary compliance.
Under questioning from Rep. Brad Wenstrup (R-OH), Mazur said the data under the information reporting piece of the Biden proposal is already being collected by financial institutions about their customers. The proposal simply asks that the information be tallied for each account on an annual basis, he said, and the compliance proposal more generally looks at increasing resources to make sure people pay taxes owed. He later said it shouldn’t be considered an invasion of privacy if banks report on inflows and outflows, and the information might even be helpful for individuals to know. Mazur said for most Americans, they get paid wages and salaries and they are very compliant.
Rep. Tom Suozzi (D-NY) focused on the personnel challenges facing the agency, and the reduction in the number of agents and audits. O’Donnell said IRS is down in terms of enforcement resources for all major contributors to the tax gap, and for enforcement of large corporations needs individuals with deep experience in examining transactions or planning them because the law is complicated. Less expertise is required to deal with a taxpayer for whom all information is on a tax return, he said, adding that IRS needs more sophisticated examiners.
Commissioner Rettig made a similar point during the Senate Finance hearing, saying, “We're looking at mid-career people in their 30s and 40s who have a degree of experience. And we’re looking for people at my level who also have a degree of experience who can not only instruct our people but can work these cases from the moment they come on board.”
During a second panel, Janet Holtzblatt, Senior Fellow, Urban-Brookings Tax Policy Center, said the IRS personnel challenges result in part from a hiring freeze for revenue agents and officers beginning in 2011 and a large numbers of retirements for employees that couldn’t be replaced, noting it is a heavily labor-intensive agency.
Testimony is available here.