Senate Democrats are pushing back on Republican plans to claw back the $80 billion allotted to the IRS in the Inflation Reduction Act (PL 117-169), charging that repealing the funding is House Speaker Kevin McCarthy’s top economic priority.
The first bill (HR 23) that House Republicans passed in 2023 repealed the bulk of that funding. Democratic Senate Finance Committee Chairman Ron Wyden of Oregon said a May 16 hearing on the subject was meant to break down, point by point, all the harm repealing it could do.
“First I want to focus on the major setback for criminal law enforcement,” said Wyden in his opening statement. “As a way to frighten typical taxpayers, Republicans have fabricated a whole lot of stories about 87,000 armed agents busting down the doors at local businesses and people’s homes. It’s nonsense.”
Wyden said the “truth” is that the IRS has “a modest but critically important” team of law enforcement personnel. Their work involves breaking up human trafficking rings, drug cartels, and enablers of child exploitation, he said. “They root out individuals and groups financing terrorists. They help crack down on criminal tax fraud and evasion, including the kind of evasion the Finance Committee identified with our two-year investigation of how Swiss bank Credit Suisse enabled a group of dual U.S. and foreign citizens to cheat on paying U.S. taxes.”
Taxpayer services would also suffer, according to Wyden, with the IRS coming off the smoothest tax filing season in many years, the McCarthy repeal plan would once again decimate taxpayer service and force taxpayers to spend hours waiting on hold with the IRS. Wyden also claimed another downside under the McCarthy plan repealing IRS funding is that it would lead to a $120 billion increase in the deficit.
“If you’re looking for the big winners of the McCarthy IRS defunding plan, it’s billionaires and corporations who cheat on their taxes,” said Wyden. “The Inflation Reduction Act funding for the IRS was designed to make sure they pay what they owe.”
The President of the National Taxpayers Union Pete Sepp reminded lawmakers that the votes in the House of Representatives to claw back the IRS funding designated for “enforcement” in the Inflation Reduction Act (the Act) are as far in the legislative process as those proposals will go—”it cannot be realistically argued that they could pass the Senate intact, much less survive a Presidential veto,” he said. “Nor, given the political state of Congress, will the appropriations or reconciliation processes permit the House Republican majority to make massive IRS budget reductions for the next two fiscal years.”
Even if that political state changes in 2025, as a practical matter no significant alterations to the current IRS funding amount would be likely until Fiscal Year 2026, pointed out Sepp. “Knowing this, opponents of the Act must turn their immediate attention to how this amount should best be spent.”
Sepp told lawmakers that no existing federal agency has ever received such a large boost of funding in percentage terms “with so little planning, safeguards, or prospects of outside managerial oversight.”
“It is now well past time for every Member of Congress to recognize this fact and act accordingly,” said Sepp. “The managerial reality is that compliance is the goal, not enforcement.”
Another witness, Natasha Sarin, professor at Yale Law School and former Treasury Counselor for Tax Policy and Implementation told lawmakers that most Americans feel that some corporations and wealthy people do not pay their fair share. “And they will not, until the IRS has the resources that it needs to pursue noncompliance so sophisticated taxpayers that choose to evade their liabilities bear costs that are sufficient to deter future malfeasance,” she said.
Sarin also agreed with Sepp that compliance should be the ultimate goal of the IRS’s decision on how to use the funds. “It will be on the IRS to show how taxpayer burden is decreased, but the likelihood of being wrapped up in a costly enforcement process should decline as the agency is better able to target scrutiny where it belongs—on high-income evaders, as opposed to those who are fully compliant with their tax obligations today,” she said.
The voluntary compliance rate is estimated to be roughly 84%, and every 1 percentage point in this level of compliance costs the U.S. approximately $40 billion dollars, according to a former chief of the IRS Criminal Investigation Service Don Fort.
Fort testified that wealthy taxpayers have historically been able to shield themselves from the scrutiny of the tax authorities through complicated, but legal tax strategies. He suggested that it stands to reason that to tackle this disparity in compliance rates, the IRS should consider a more equitable allocation of enforcement resources by addressing tax scams and other illegal activities that benefit the rich without targeting low and middle-income earners.
“[Act] funding should bridge this gap and allow CI to use data analytics, increased staffing, and better coordination with civil partners to find the most egregious tax cases to work.”
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