IRS Commissioner-nominee pledges to uncover corporate taxes owed

Dive Brief:

The nominee to lead the Internal Revenue Service said that if confirmed by the Senate he will seek to uncover an estimated 20% of income generated by companies and wealthy individuals that is not reported to the agency.
“An assessment from the National Bureau of Economic Research indicates that working people pay 99% of the taxes they owe, while 20% of the income from wealthy individuals and large corporations is shielded from IRS view,” Daniel Werfel, the nominee to serve as IRS commissioner, said in reply to questions from members of the Senate Finance Committee.
“In order for the tax system to work, taxpayers must have confidence that all taxpayers, regardless who they are, pay what they owe,” Werfel said, adding that he would prioritize “closing the tax gap where IRS has historically lacked the capacity to unpack complex returns of wealthy and corporate tax evaders.”

Dive Insight:

Werfel has said he would focus much of an $80 billion increase in the agency’s budget during the next decade on enforcement. For example, the agency would hire 87,000 employees and deploy many of them to analyze complex tax returns with the aim of narrowing the tax gap, he said during a confirmation hearing last month.

The IRS estimates that the annual difference between taxes owed and taxes paid was $496 billion from 2014 through 2016. Corporations during the period annually underreported $37 billion in tax liabilities and “underpaid” $4 billion of taxes due in on-time filings, the Government Accountability Office said after analysis of agency data.

“Modest reductions in the gap could yield large fiscal benefits,” the GAO said in a report released Monday.

The GAO found several causes of the tax gap beyond outright evasion. Individuals tend to underreport their income because employers and other third parties fail to report income to them and to the IRS. Sole proprietors “represent the largest share of the individual underreporting tax gap.”

Also, the tax gap has persisted because congressional cuts to the IRS budget triggered a decline in audit rates last decade, GAO said.

Appropriations to the IRS last decade declined by more than 15% and its workforce was cut 20%, according to an NBER paper co-authored by former Treasury Secretary Lawrence Summers.. As a result, audit rates for millionaires fell by 75% and the audit rate for large corporations declined to less than 50% from nearly 100%.

Poor taxpayer services, including long wait times on the phone, complicate efforts by taxpayers to comply with their tax responsibilities, widening the tax gap, GAO said. The complexity of the tax code and abusive tax shelters, such as offshore insurance products, also hold down tax revenues.

“Multiple strategies are needed to reduce” the tax gap, the GAO said. The IRS should set quantitative goals and put in writing a plan for using data to strengthen compliance strategies.

The IRS should also research ways to increase third-party information reporting, put paper returns in a digital format and update the so-called Dirty Dozen list informing taxpayers on how to report promoters of abusive tax schemes, the GAO said.

Werfel affirmed in his reply to the Senate committee that the increase in IRS funding will not go toward increasing audit rates for households and small businesses making less than $400,000 per year.

Werfel also aligned with a recommendation in another GAO report that the IRS upgrade technology as much as six decades old and reduce the risk to the security of its operations.

The GAO noted that the IRS recently suspended efforts to upgrade the Individual Master File that includes data on tax accounts using technology dating to 1970.

Werfel described three “top modernization priorities”:

updating the IMF and Business Master File “to optimize data security and cyber resilience”;
“embedding innovative technology into IRS service work — whether on the phone or online — to help significantly increase responsiveness to taxpayers trying to make contact with the IRS”;
“digitizing paper forms into machine-readable output upon receipt” to shrink a backlog of unprocessed returns.