I seem to recall not long ago that the IRS received billions of dollars in new government funding to hire, among other things, new agents to go after the wealthy Americans, the one-percenters, who wouldn’t really feel the pinch anyway. Well, according to the IRS, the agency plans on more audits, and not just on the one-percenters. In addition, the IRS plans to use what they refer to as “other enforcement” measures. Whatever that is, it can’t be good.
So why is the IRS in such a fuss about this? To be honest, Americans are allegedly in arrears on taxes owed. The IRS states that Americans failed to pay $688 billion in taxes on their 2021 returns, a record level, according to a new estimate. Righteous bucks. The number reflects an increase of more than $138 billion from estimates for tax years 2017 to 2019, the agency said.
IRS Commissioner Danny Werfel said that the rising tax gap estimates “underscores the importance” of more compliance efforts. Part of the $80 billion the IRS received from the Biden administration’s Inflation Reduction Act is being used for that purpose. And another part is being targeted to a group that the IRS said it wouldn’t be hounding, low-income tax payers. A large increase in federal income tax audits targeting the poorest wage earners allowed the Internal Revenue Service to keep overall audit numbers from further declines for Americans as a whole during fiscal year 2021. That resulted in these low-income wage earners with less than $25,000 in total gross receipts being audited at a rate five times higher than for everyone else.
How do the millions of Americans get into this situation in the first place? As you can imagine the reasons are myriad. According to Harlan Levinson, a Los Angeles based CPA, his clients are late on tax payments because, “Some people say they didn’t feel like opening the mail, or they don’t have the time to do their taxes…Then there’s the Americans who just don’t have the money to pay their taxes, or who are overwhelmed by the whole tax filing process.” It would be interesting to know what percentage of people feel intimidated by the process. It can be overwhelming, and that was one of the big reasons behind the push for a flat-rate tax. This could be done with one calculation and sent to the IRS on a postcard. Perhaps one day. The overall numbers of those who file is actually quite impressive. Taxpayers’ overall compliance rate is projected to stay relatively steady at 86.3% for tax year 2021, after audits and other enforcement actions. So the outstanding $688 billion is owed by a little less than 15% of Americans who are required to file. Not too shabby.
One could write a scathing headline that the IRS has reduced its pursuit of millionaire filers over the last several years. If this is true, you have to wonder why in-kind resources would be allocated to pursuing low-income filers versus more opportune wealthy ones. Tax data compiled by Trac bears this out.
Evidently the reason being is that the IRS is understaffed. Perhaps it takes more time and effort to go after a millionaire than an average tax payer. In the IRS’ defense, high-income tax payers file more intricate and complicated tax filings. According to Trac, only this class of auditors, given sufficient training and experience, are qualified to examine complex tax returns, the types of returns typically filed by high-income individuals and large-scale businesses.
Repatriating any of the outstanding tax debt might help with the overall annual budget deficit. According to the Congressional Budget Office, the gap between spending and revenue for fiscal year 2023, which ended on Sept. 30, was $1.7 trillion. That would be a roughly $300 billion widening in the shortfall from fiscal year 2022. This is significant in our current higher-interest rate environment. Higher Treasury yields increase the amount of money the federal government has to spend paying back its debt. More than half of all debt will mature in less than three years, meaning the government’s borrowing could keep costing more.
The Penn Wharton budget model has recently proclaimed some staggering statistics regarding tax revenues and the overall budget deficit. According to Penn Wharton, the economics profession has long focused on “debt held by the public”, currently equal to about 98 percent of GDP at $26.3 trillion, for assessing its effects on the economy. They estimate that the U.S. debt held by the public cannot exceed about 200 percent of GDP even under today’s generally favorable market conditions. As such, under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly. It’s time to wake up and smell the coffee America!
