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The Biden Administration continues to emphasize its focus on increased tax compliance and enforcement by citing a reduced tax gap as a funding source for the new infrastructure deal.

Background

Since April 2021, President Biden has released several proposals about increasing IRS enforcement.

The American Families Plan, released in April 2021, includes a proposal to increase investment in IRS enforcement to allow for greater focus on large corporations, businesses, estates and higher-income individuals (see Tax Alert 2021-0875).

On 28 April 2021, the Treasury Department issued a press release detailing the government's plan to improve tax compliance by directing $80 billion in increased revenue to the IRS over the next 10 years to: (1) improve technology; (2) increase the hiring and training of auditors to focus on complex investigations of large corporations, partnerships and global high-wealth individuals; and (3) increase enforcement against high-income individuals (see Tax Alert 2021-5517).

More recently, on June 24, 2021, the White House released a fact sheet with high-level details on an infrastructure deal between President Biden and a bipartisan group of senators (see Tax Alert 2021). One of the proposed offsets for the $579 billion in new spending would be reducing the tax gap through increased enforcement. The press has reported that senators involved in the bipartisan negotiations said the deal's tax gap proposal, which would provide the IRS with $40 billion in funding over 10 years, would produce approximately $100 billion in tax revenue from enforcement without changing tax laws.

Treasury Green Book

The Biden Administration's FY2022 budget and Treasury Green Book, released in May 2021, also focus on increased compliance and enforcement by, among other things, infusing the IRS with additional funding from FY 2022 through FY 2031 (see Tax Alert 2021-1121). The proposal includes enhancing information technology capabilities, implementing the proposed financial information reporting regime and improving taxpayer service, as well as increased enforcement against those with incomes over $400,000.

Implications

If the funding increase is enacted, the IRS will add significant numbers of employees to its enforcement ranks, invest in technology and data analytics to detect noncompliance, and enhance risk assessment capabilities and mechanisms. Given the Administration's continued proposals and bipartisan support for increased IRS funding, taking action now is preferable to waiting for an audit to happen. Taxpayers should consider doing a "health check" (i.e., examine their value chain to identify areas of risk around their current positions and consider any course corrections that might be needed to mitigate those risks going forward). Taxpayers may also want to assess benefits offered by Advance Pricing Agreements and other mechanisms that provide certainty so that they can focus their resources and attention on their business instead of potential tax issues.

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