Phil Swagel, the director of the Congressional Budget Office (CBO), on Sept. 2 published a blog post titled “The Effects of Increased Funding for the IRS.”
“CBO estimates that portions of the Administration’s proposal to increase funding for the IRS by $80 billion over the 2022–2031 period would increase revenues by approximately $200 billion over those 10 years,” Swagel wrote. The estimate does not include changes in revenue resulting from parts of the proposal that involve new information reporting requirements and other changes to the Code, he noted.
The spending proposal involves two types of funding: discretionary appropriations, which would primarily be used for enforcement activities; and mandatory funding, which would be used for a variety of activities.
According to Swagel, spending would increase in each year between 2021 and 2031, with the highest growth in the first several years. “By 2031, CBO projects, the proposal would make the IRS’s budget more than 90 percent larger than it is in CBO’s July 2021 baseline projections and would more than double the IRS’s staffing,” the blog said.
It is expected that approximately $60 billion would be used for enforcement and related operations support. CBO has estimated that the funding boost would increase revenues by approximately $200 billion.
“CBO’s estimate of revenues is based on the IRS’s projected returns on investment (ROIs) for spending on new enforcement initiatives,” Swagel explained, adding that in recent years peak ROIs for IRS have ranged from 5 to 9.
In his discussion of ROIs, he noted that CBO estimates that an audit of medium complexity would take 24 months to complete. “That time, combined with the expected training time for an experienced new hire, suggests that the IRS would begin to collect revenues 30 months after the new hire joined the agency,” Swagel wrote.
The estimated change in revenues is relative to the amount of revenues collected under current law. CBO’s estimate assumes that the proposed increase in funding would follow the proposed expansion of information reporting. “The estimate reflects CBO’s expectation that the increased enforcement activities would change the voluntary compliance rate – that is, the share of taxes owed that are paid voluntarily and on time – only modestly,” the blog said. “The magnitude of that effect is highly uncertain, however,” it added.
Revenue changes stemming from the increased funding could differ from CBO’s estimate, said Swagel. “It depends on the IRS’s ability to hire experienced candidates, changes in voluntary compliance, and the interaction of enforcement funding with the IRS’s other capabilities,” he wrote.
The intention of IRS is to hire mid- and senior-level people with private-sector experience who will not require extensive training to become productive. “But it might not be able to hire its desired mix of candidates,” the blog said, adding that “a related source of uncertainty is attrition.”
Swagel also noted that a funding increase could signal that IRS was more capable of spotting noncompliance, with a resulting increase in voluntary compliance and revenues. “However, if there were fewer noncompliant taxpayers to audit, the ROIs from the IRS’s enforcement activities would drop, and the direct revenues from increased enforcement would be lower than CBO estimated,” he opined.
The Biden proposal would bring audit rates up to the levels of 10 years ago, with the rate rising for all taxpayers but with higher-income taxpayers facing the largest increase, wrote Swagel.
“In addition, the Administration’s policies would focus additional IRS resources on enforcement activity aimed at high-wealth taxpayers, large corporations, and partnerships. CBO estimates that if the proposals were enacted, tax compliance would be improved, and more households would meet their obligation under the law,” according to Swagel.
Finally, a boost in audit rates would likely result in some audits of taxpayers who would then be determined not to owe additional taxes. “However, the Administration’s proposal for more information reporting, as well as additional spending on IRS technology, might reduce the burden on compliant taxpayers by allowing the IRS to better target noncompliant ones and to reduce the number of audits that resulted in no change in tax assessment,” Swagel wrote.
The blog is available at https://www.cbo.gov/publication/57444.
This article originally appeared in the September 2, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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