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The Internal Revenue Service could be missing out on collecting approximately $1 trillion every year from taxpayers who are not paying their full tab, Charles Rettig, the tax collector agency’s commissioner, said Tuesday.
“It would not be outlandish to believe that the actual tax gap could approach and possibly exceed $1 trillion dollars,” Rettig told members of the Senate Finance Committee.
“We do get out-gunned. There’s no other way to say it,” he later added.
The $1 trillion number was “shocking,” said Sen. Ben Cardin, a Democrat from Maryland.
The figure is massive by itself, but Rettig’s own estimation during Tuesday’s hearing of the federal tax gap — which is the difference between taxes legally owed and taxes actually paid — was a drastic upward revision of the IRS’s own projections.
Rettig said the agency’s existing estimates of the tax gap read like they’re “from the dark ages.” The most recent official IRS estimates said that every year from 2011 and 2013, taxpayers failed to pay $441 billion in tax money. IRS compliance efforts and late payments narrowed that annual divide to $381 billion.
A lot’s changed since then, Rettig explained, starting with rise of cryptocurrency.
The IRS counts virtual currency like Bitcoin
BTCUSD,
and Ether
ETHUSD,
as property. When an owner profits off the currency, the IRS says that’s subject to capital gains rules — but the IRS has to know about the transactions before it can assess taxes.
In recent years, the IRS has been stepping up enforcement on cryptocurrency tax compliance, most recently by obtaining a court order for account information for users at one digital exchange.
Foreign income, such as offshore accounts, and illegal source income also contribute to the tax gap, Rettig said.
Less than a month ago, IRS researchers were some of the authors on a new study that looked into tax evasion and pointed a finger at the wealthiest taxpayers.
Under-reporting for taxpayers on the bottom half of the income ladder rose 7% when researchers re-examined returns using more stringent methods. It jumped 21% for the top 1% of earners. The researchers considered offshore accounts and pass-through entities as tactics to mask wealth.
“We are up against more sophisticated elements in the community, practitioners and others, and the tools that they are using,” Rettig said Tuesday.
The IRS is also up against a shrinking staff and budget, which means the agency is performing fewer and fewer complex audits to recoup cash. In the last 10 years, the IRS is down 17,000 members in its enforcement wing alone, Rettig said. “That has to have an effect, and it does,” he told lawmakers.
That’s where the federal budget comes in. President Joe Biden’s is pushing for massive infrastructure spending, which would be powered by corporate tax hikes.
His administration recently released a budget proposal that would set aside $13.2 billion for the IRS. If enacted, that would be a 10.4% increase from this year’s level, according to the Tax Policy Center.
The point of the IRS budget bump is to beef up oversight of rich taxpayers and corporations, the White House said last week. The money is meant “to increase oversight of high-income and corporate tax returns, ensuring that the wealthy and well-connected pay what they owe and play by the same rules as everybody else.”
If it goes through, the agency’s budget increase would be about $1 billion dollars.
With that cash, Rettig said Tuesday he could do things like hire 4,875 more employees in the enforcement side of the agency.
It’s not like IRS staffers are resigned to tax cheats, Rettig said Tuesday. “Our people are equally offended by people who don’t comply.”
