On a webpage, the Treasury Department has outlined a series of proposals in President Biden’s American Families Plan (the Plan) that overhaul tax administration and provide the IRS the resources and information it needs to address the tax gap (that is, the difference between the amount of tax owed by taxpayers for a given year and the amount that is actually timely paid for that same year) and tax compliance.
Plan’s spending and tax increases.
The White House has released details of what the president is calling the American Families Plan. The Plan includes $1.8 trillion in investments and tax credits for American families and children over ten years. The Plan also proposes to raise the top income tax rate; tax some capital gains at the top income tax rate; and, in some cases, tax a capital asset’s unrealized gain upon the owner’s death. See President Biden’s Families Plan Fact Sheet contains numerous tax provisions.
Plan’s tax compliance measures.
Also as part of the Plan, the president is proposing a set of measures to ensure that the wealthiest Americans pay their share in taxes.
The IRS says that a recent study found that the top 1% of individual taxpayers failed to report 20% of their income and failed to pay nearly $175 billion in taxes owed annually.
According to the Treasury Department, this tax gap has many underlying causes, chief among them being insufficient IRS resources. Budget cuts over the past decade have resulted in IRS lacking the capacity to address sophisticated tax evasion efforts. Over this period, audit rates for taxpayers making over $1 million in income have fallen by almost 80%.
These considerations provide the basis for a series of proposals in the Plan that overhaul tax administration and provide the IRS with resources and information it needs to address tax evasion. All told, according to the Treasury Department, these reforms will generate an additional $700 billion in tax revenue over the course of a decade, net of the investments made.
Specifically, the tax administration reforms proposed in the Plan will:
Provide the IRS the resources it needs to stop sophisticated tax evasion.
Over the last decade, a declining IRS budget has deprived it of the resources it needs to effectively enforce our nation’s tax laws. After accounting for inflation, the IRS budget has fallen by about 20%, and its workforce has been depleted, with the number of “complex revenue agents” (who are dedicated to high-end evasion and large corporate cases) falling by 35%. As a result, IRS audits have fallen across the board, and particularly for the highest earners.
A key component of this initiative is the provision of a sustained, multi-year stream of funding. Altogether, the proposal directs roughly $80 billion to the IRS over a decade to fund an array of priorities – including overhauling technology to improve enforcement efforts, which is more effectively implemented with the assurance of a consistent funding stream. The Treasury Department says that this investment will also facilitate the IRS hiring and training auditors to focus on complex investigations of large corporations, partnerships, and global high-wealth individuals. The Plan directs that additional resources go toward enforcement against those with the highest incomes, rather than Americans with actual income of less than $400,000.
Provide the IRS with more complete information.
When the IRS has information from third parties, income is accurately reported, and taxes are fully paid. However, high-income taxpayers disproportionately accrue income in opaque sources – like partnership and proprietorship income – where the IRS struggles to verify tax filings. As a result, up to 55% of taxes owed on these less visible income streams is unpaid, with disproportionate levels of non-compliance for those at the top of the income distribution.
Overhaul outdated technology to help the IRS identify tax evasion.
Elements of IRS IT systems are antiquated and make it difficult for the IRS to identify those taxpayers who are not paying their taxes and to help those who want to comply.
Improve taxpayer service and deliver tax credits.
A well-functioning tax system requires that taxpayers be able to interact with the IRS in an efficient and meaningful manner. Service enhancement will improve the ability of the IRS to communicate with taxpayers securely and promptly.
Regulate paid tax preparers.
Taxpayers often make use of unregulated tax preparers who lack the ability to provide accurate tax assistance. These preparers submit more tax returns than all other preparers combined, and, the Treasury Department says, they make costly mistakes that subject their customers to painful audits, sometimes even intentionally defrauding taxpayers for their own benefit. The Plan calls for giving the IRS the legal authority to implement safeguards in the tax preparation industry. It also includes stiffer penalties for unscrupulous preparers who fail to identify themselves on tax returns and defraud taxpayers (so called “ghost preparers”).
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