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Millionaires Get a Lot More IRS Audits in Democratic Bills

February 18, 2021
In The News

Wealthy individuals and large companies would face a major increase in the risk of getting audited by the IRS in two bills unveiled by Democratic lawmakers Thursday.

The U.S. government could take in $1.2 trillion in additional tax revenue over a decade without raising marginal rates by aggressively auditing wealthy individuals and corporations, according to a new bill from Representative Ro Khanna of California.

Both his legislation and a bill reintroduced Thursday by Peter DeFazio, chair of the House Transportation and Infrastructure Committee, would have some 95% of large companies audited each year, using somewhat different calculations for size. DeFazio and Khanna are also pushing to ramp up funding for the Internal Revenue Service to crack down on the underpayment of taxes owed.

The proposals would help boost revenue as Democrats seek funding sources for President Joe Biden’s plans for a longer-term economic recovery program, including infrastructure that’s expected to cost trillions of dollars.

“We know our tax system is broken, and it’s long past time we start fixing it,” Khanna said in a statement. “Wall Street has been able to act like high-rolling gamblers with almost zero consequences for far too long. Right now, the wealthiest 1% are responsible for roughly 70% of the ‘tax gap’ -- the difference between taxes owed and taxes paid. It’s time every American pay their fair share.”

DeFazio said that current estimates put the annual tax gap at more than $600 billion.

DeFazio, an Oregon Democrat, said in a separate statement on his bill, “It’s not enough that our tax code gives billionaires and giant corporations huge tax handouts -- the agency responsible for collecting the taxes from these top earners is woefully underfunded and ill-equipped to do so.”

A tax-policy approach focused on enforcement could garner broader support than outright tax hikes, which Republicans would seek to block. Biden has also said he wants to expand the IRS’s audit capabilities as part of a broader tax overhaul.

Khanna’s legislation would require the IRS to annually audit 95% of companies with at least $20 billion in assets and 50% of individuals earning at least $10 million.

Those levels would substantially heighten the likelihood of getting audited. In 2018, just 3.6% of companies with at least $20 billion in assets were audited and 0.03% of individual returns with at least $10 million in income were examined, according to IRS statistics.

Khanna’s legislation would also require the IRS to audit one-third of those taxpayers earning $5 million to $10 million and one-fifth of those earning $1 million to $5 million. It would also require the agency to examine 40% of estate-tax returns worth more than $10 million.

Taxpayers could also face fines as high as 40% for underpaying their tax bills. Pass-through business owners, such as those earning money through a limited-liability company or partnership, would also have to file more paperwork reporting the source of their income.

The legislation would give the IRS $100 billion over a decade to hire staff and expand the audit program, increase spending on taxpayer services and to improve computer systems to better detect fraud. That funding would come close to nearly doubling the agency’s annual budget -- which is $12.1 billion this year.

Existing Efforts

The IRS has already begun expanding some enforcement efforts under Commissioner Chuck Rettig. The agency has focused on targeting abusive transactions tied to cryptocurrency and land-conservation deals. Agency officials said last year they plan to increase audits on small businesses and investors by 50% in 2021.

Under procedures that Congress approved in 2015, the IRS can more easily collect any underpaid taxes it finds during the audits of many small businesses. Instead of having to track down each investor, the IRS can now collect the money from the partnership itself. Still, the agency said it needs more money to greatly expand enforcement efforts, which have declined in recent years as lawmakers cut the IRS’s budget.

The Treasury Department says the IRS can collect an additional $5 in tax revenue with every additional $1 in funding Congress appropriates to the IRS. Khanna’s bill would also raise money from penalties.

Estimates about the return on audit spending vary greatly. Former Treasury Secretary Larry Summers and University of Pennsylvania law professor Natasha Sarin have argued that increasing the IRS budget over the next 10 years by $100 billion would raise $1.15 trillion. The Congressional Budget Office has a more modest calculation, suggesting the IRS could collect up to $3 for every additional $1 in funding.