By David Lawder

PHILADELPHIA – In President Joe Biden’s $1.75 Billion social and climate spending plan, U.S. Government aims to increase revenue by $400 billion over a decade.

The largest revenue source in this week’s legislation is from the IRS. Wally Adeyemo, Deputy U.S. Treasury secretary told Reuters that a resurgent fear among wealthy Americans of IRS audits will discourage tax avoidance.

Although many of Biden’s initial investment priorities were trimmed or eliminated from the bill over the years, the plan to invest $80 Billion in the IRS for the next ten years survived. The bill’s approval would enable the hire of thousands more revenue agents, and the replacement of antiquated computers in coming years.

Adeyemo said that it will be time-consuming to hire agents and update systems, as well as pursuing complex audit cases. He also stated in an interview with Reuters that he thinks wealthy people will reconsider hiding their income to avoid tax.

    “When you are focusing on audits and people see that audits are happening — especially amongst people who are situated similar to them — you have better compliance,” Adeyemo said during a visit to Philadelphia to promote the bill’s increased Child Tax Credit benefits.

    “When they see more cops on the beat looking at tax returns, what people will decide is that it’s better to pay than to pay the penalty in the end.”

After years of budget cuts and underinvestment, largely under Republican-controlled Congresses, the IRS has 17,000 fewer revenue agents than a decade ago. In fiscal 2019, the audit rate for individual taxpayers was 0.4%, which is half of the 0.8% rate in 2015 but far lower than the 1.98% rate from 1977.

In April, Charles Rettig (IRS Commissioner) was appointed by Trump to tell senators that his agency is being “outgunned by tax avoidance schemes. These sophisticated tax avoidance strategies underreport capital gains and business income, creating a gap between the owed and collected taxes of up to $1 trillion per year.

TARGETING TAX COATS

Treasury used to have higher expectations for IRS enforcement, which was intended to close the gap in tax by $700billion over 10 years. This is approximately 10% of the $7 trillion gap.

However, that proposal was contingent on Congress authorizing new reporting requirements by banks for account inflows or outflows below $600 annually. This will allow the IRS to identify audit targets through matching reported income and account activity.

Some lawmakers were concerned about the $600 threshold and Biden removed it from his revised spending plan.

Adeyemo stated that the IRS would still have the ability to employ more advanced technology (including machine learning) to target those who are most wealthy as the IRS invests in new systems, and hires more agents.

He suggested that the tax surcharge proposed by the bill of 5% on adjusted income over $10 million or 3% above $25,000,000 may be attractive to wealthy taxpayers, but that it is up to IRS to address this issue.

The question is how can you make use of IRS resources to validate, verify and then go outside and ask questions? Adeyemo added that we will have more people who could ask such questions.

Adeyemo described the IRS investment target of $400 billion as a conservative estimate. However, Adeyemo said that the IRS will have to be more aggressive in closing the tax gap.

Although we don’t think we will be able close all the gaps with our resources, we believe we can make a substantial dent.”