It’s time to fully fund the IRS

These are challenging times for the federal agency Americans — quite unfairly — love to hate: the Internal Revenue Service. Having been deprived of funding increases by mostly Republican Congresses over the past decade, the IRS is being asked to operate during a pandemic with roughly onefifth less budget and one-fifth fewer staff than it had in 2010. Yet its mission has been expanded in the past year to include not only collecting money but also sending out repeated “stimulus payments,” the most recent of which were approved by Congress earlier this month. Small wonder that the IRS is behind on processing returns for tax year 2020 and had to postpone the filing deadline from April 15 to May 17.

Nor is it any surprise that the underfunding of this agency has affected its enforcement of the tax code, leading to hundreds of billions of dollars in tax avoidance, the majority of it by upper-income households. In 2019, the IRS estimated this “tax gap” at $381 billion per year, based on data from 2011 to 2013. A new peerreviewed study of this perennial problem, published Monday by a team of academic and IRS analysts, suggests it is even larger than previously feared. Though it’s almost impossible for ordinary people to avoid reporting income to the IRS — their employers do it for them on W-2 forms — upper-income taxpayers can make much greater use of self-reporting via partnerships and other sophisticated “pass-through” entities. Random audits, which are less frequent now than they were 10 years ago, are relatively ineffective at thwarting such techniques, the report notes.

The upshot is that 36% of all unpaid federal income taxes are owed by the top 1% of households; in theory, collecting that from them would yield $175 billion annually. These findings are consistent with a 2020 estimate by law professor Natasha Sarin of the University of Pennsylvania and former treasury secretary Lawrence Summers that restoring IRS funding to 2011 levels, in real terms, could net the government $1 trillion over 10 years.

That may be overly optimistic, in part because tax avoiders will undoubtedly find new ways to hide their money if there’s a crackdown. Nevertheless, when it comes to reining in federal deficits, better enforcement of the existing tax code is — or should be — a no-brainer. Those Republicans who vilified and defunded the IRS over recent years were essentially managing to achieve greater tax cuts for the rich than the already large ones they had passed into law. Even then-President Donald Trump — not exactly an eager taxpayer himself — allowed his treasury secretary, Steven Mnuchin, to embrace the principle that investments in tax enforcement pay for themselves, usually several times over. Trump actually presided over modest budget increases at the IRS, though nowhere near enough to restore a robust enforcement capacity. The agency received a two-year infusion of $1.4 billion from this year’s COVID relief bill, mostly to modernize technology.

Democrats have advocated higher taxes on the wealthy, which are warranted but, for the time being, politically difficult given GOP opposition. Meanwhile, it’s time to start making sure those at the top pay what the current law says they owe.