Why Republicans Are Attacking IRS Funding In Biden's Inflation Reduction Act

An amazingly simple scheme illustrates how wealthy Americans use political influence to avoid taxes.
The IRS may have unwittingly helped thousands of superrich Americans stash their wealth in offshore "shell banks," a recent U.S. Senate investigation found.
The IRS may have unwittingly helped thousands of superrich Americans stash their wealth in offshore "shell banks," a recent U.S. Senate investigation found.
Michele Westmorland via Getty Images

There is one particular provision of the Inflation Reduction Act, President Joe Biden’s $369 billion investment in health care and climate change prevention, that has sent Republican lawmakers into a spasm. They believe, falsely, that the law will allow the IRS to hire 87,000 new revenue agents to go after ordinary taxpayers.

“They’re coming for YOU too,” Sen. Ted Cruz (R-Texas) tweeted in early August. Sen. Ron Johnson (R-Wis.) wrote, “Who do you think they’ll weaponize the 87,000 IRS agents against? The answer is obvious. Their political enemies.”

The IRS funding is quickly becoming a stand-in for any type of perceived government overreach, to a ludicrous extent. “After todays raid on Mar A Lago what do you think the left plans to use those 87,000 new IRS agents for?” Sen. Marco Rubio (R-Fla.) tweeted last month.

While the Inflation Reduction Act does include $78 billion over 10 years for the IRS, that money is mainly to help the agency backfill thousands of existing positions, such as IT people, taxpayer customer support — and, yes, auditors. But they will primarily be assigned to focus on ultrawealthy Americans and corporate tax cheats.

Those positions have gone empty largely because of Republican efforts to choke off funding to the IRS. Since 2010, when the GOP recaptured the House, Republicans have succeeded in cutting enforcement funding by double digits and bringing down audit rates of large corporations and superrich individuals to historic lows.

Republicans are eager to keep it that way since the party relies utterly on the wealthiest individuals to fund their election efforts. Rich political donors favor the GOP by nearly any measure: A majority of the country’s largest donors support Republicans; megadonors make up an outsized share of Republican fundraising; the overall donor class is richer and more conservative than the average American. If the IRS were to step up enforcement against tax evasion among the wealthiest individuals, it would more than likely target Republicans’ biggest benefactors.

As it happens, the Department of Justice recently charged one of those donors with perpetrating the largest known tax fraud scheme in U.S. history. Robert Brockman, who died in August, was a software billionaire who was accused of constructing a web of offshore companies over a period of 14 years in order to hide more than $2 billion from tax collectors. Over the years, Brockman has also showered Republican election efforts with large donations, including $100,000 to former House Speaker Paul Ryan’s political committees, and $1 million to super PACs supporting then-presidential candidate Mitt Romney.

Brockman’s tax evasion tactic was relatively simple. A new report from the Senate Finance Committee attributes his success in hiding billions of dollars less to his ingenuity and more to the IRS’s severe lack of enforcement capability.

His scheme involved getting around the Foreign Account Tax Compliance Act, or FATCA, a 2010 law that requires global banks to report the assets of their U.S. clients to the IRS. Congress passed the legislation to make it more difficult for Americans to hide taxable wealth abroad. But Brockman got around the law by hiding his money in foreign shell companies which he then turned into “shell banks” by registering the shell companies with the IRS as offshore financial institutions.

He then used those shell banks to stash his assets with two Swiss banks, Mirabuad & Cie and Syz Group. Both institutions argued that they did not have to report the assets back to the IRS because they technically belonged to a financial institution, not to an individual in the U.S.

What makes this scheme “alarmingly simple,” in the words of the Senate committee, is that in order to create a shell bank — the linchpin of Brockman’s plan — an entity or an individual only has to fill out a single form with the IRS. Because of resource constraints at the IRS and the sheer volume of requests, the agency told Senate investigators, the IRS almost always approves the application without doing any due diligence on who is making the request or what assets they may be concealing.

“They have no clue how many are undeclared assets and how many are associated with a legitimate business,” said a Democratic aide to the Finance Committee. “It’s just a huge black hole as far as tax activity.”

Thousands of wealthy individuals may be using this method to hide their wealth abroad, the report concluded. When the IRS approves one of these applications, it issues the entity a Global Intermediary Identification Number, or GIIN. In eight of the countries where Brockman offshored his wealth — including known tax havens like Switzerland, the Cayman Islands, the British Virgin Islands, and Guernsey — there are nearly 130,000 unique entities doing business with GIINs issued by the IRS.

Senate investigators concluded that the IRS might never have discovered Brockman’s tax evasion were it not for a whistleblower and a business associate, Robert Smith, who flipped on him.

“The committee strongly supports immediate action to make it more difficult for wealthy tax cheats to stash funds overseas in secret offshore accounts,” the Senate Finance Committee report said. To that end, it said the $78 billion in the Inflation Reduction Act “is a significant step forward.”

The report urged Congress and the Treasury Department to go further and require more due diligence on foreign financial institution activity and rigorous screening of GIIN applicants, strengthen the IRS whistleblower office, and increase enforcement resources so that the IRS can audit large and complex foreign partnerships.

House Minority Leader Kevin McCarthy’s (R-Calif.) recent tweet, “Democrats in Washington plan to hire an army of 87,000 IRS agents so they can audit more Americans like you,” would be true if his intended audience was ultra-wealthy tax cheats. They might soon owe the IRS more money — and might potentially have to describe to the Department of Justice why they never paid it.

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