The Biden Administration and moderate Republicans have come to an agreement on a scaled-back infrastructure framework that drops proposed tax increases. Instead, the plan will be funded through a combination of closing the “tax gap”, redirecting emergency funds, targeted corporate user fees and the “macroeconomic impact of infrastructure investment,” according to a White House fact sheet. While the majority of Republicans reject increased IRS funding, moderate Republicans accepted a modest IRS funding proposal.
Targets of IRS Enforcement
The latest agreement would increase the IRS budget by $40 billion which could raise $100 billion in revenue. The IRS announced at a recent New York University tax conference that its small business and criminal investigations divisions are adding 2,500+ new employees, including revenue agents and criminal investigators. The increased funding and hiring initiatives could greatly increase audits and collections.
These efforts come as appropriations for the IRS have fallen by about 20% (adjusted for inflation) since FY 2010. The decline in the overall IRS budget has resulted in a 15% decline in the number of full-time employees at the agency since FY 2010, and Treasury is looking to reverse this decline.
Who is the IRS planning to target? A recent House subcommittee hearing gives some insight into that question. Ways and Means Select Revenue Subcommittee Chairman Mike Thompson (D-CA) said in his opening statement “…over the past decade, the IRS has been starved of resources to go after a significant contributor to the tax gap – wealthy taxpayers” who can use sophisticated methods like “complicated partnership structures” and can “send assets overseas” to evade taxes.
The Subcommittees also heard testimony from Deputy Assistant Treasury Secretary for Tax Policy Mark Mazur, who noted that the mandatory nature of increased funding will allow the IRS to invest in “high-quality tax enforcement staff” who have the skills and knowledge to understand the complicated tax situations of corporations, partnerships and high-income individuals.
The lawmakers also heard from Janet Holtzblatt, Senior Fellow at the Urban-Brookings Tax Policy Institute, who made four points in her testimony:
- A decade of deep cuts to the IRS budget has hindered its ability to administer an increasingly complicated tax code.
- Increasing the IRS enforcement budget would generate more revenue than it would cost.
- Boosting the number of audits is not a sufficient revenue-raising measure without improvements in the selection and operation of examinations.
- Before the IRS can hire and train new staff and invest in new technology, it must be assured of sustained funding not only for this year but for future years as well.
Holtzblatt estimates it will take 3-5 years to reap the benefits of increased IRS funding.
Douglas O’Donnell, Deputy IRS Commissioner For Services and Enforcement, testified that the increased funding will allow the IRS eventually to double its compliance efforts on partnerships and high-wealth returns and devote more resources to examining corporations with balance sheet assets greater than $10 million.
President Biden and Treasury representatives have indicated that they do not intend to focus the increased enforcement measures on taxpayers with less than $400,000 in income, a pledge also made with regard to direct tax increases.
User Fees
The infrastructure plan also includes increased user fees as a funding mechanism, including an extension of customs user fees and reinstatement of Superfund fees for chemicals. Possible increased gas taxes or electric vehicle taxes have been dropped from the compromise measure.
The Bottom Line
While there is certainly potential for change, the current infrastructure compromise could have tax implications. We would expect to see:
- More audits of high-wealth taxpayers.
- More scrutiny of complicated partnership structures.
- Further enforcement efforts to identify foreign assets.
- More audits of smaller corporations, those with assets as low as $10 million.
Outlook
Congress is set to take up the bill after the July recess, though it has a long way to go before passage. Opposition is coming from both sides of the aisle, so enactment is by no means certain. Still, the compromise measure is the closest to a bipartisan agreement the Biden Administration has gotten so far, and there is a lot of momentum to push it through.