Republicans Decry Democrats’ Push For IRS Crackdown On Tax Evasion

The party of “law and order” hates strict enforcement of tax laws.

WASHINGTON — Democrats have ditched their dreams of higher tax rates on individuals and corporations, settling instead for a corporate minimum tax and stricter enforcement of current laws.

Merely proposing that the Internal Revenue Service crack down on tax evasion, however, has prompted a fierce Republican response.

“They’re just gonna go attack every small business person,” Sen. Rick Scott (R-Fla.) told HuffPost. “We know how the IRS treats people. You’re guilty until proven innocent.”

The Inflation Reduction Act, which Democrats are hoping to push through the Senate without any Republican votes this month, would boost the IRS budget by $80 billion, with more than half of that going toward enforcement and $3 billion of it for improved customer service.

“This is an agency that only succeeded in answering about one out of every 50 phone calls during the 2021 tax season,” Sen. John Thune (R-S.D.) said on the Senate floor Tuesday. “Yet 4% of the $80 billion is going to taxpayer services — 57% goes to enforcement, so that the IRS can spend more time harassing taxpayers around this country.”

The U.S. relies on voluntary compliance with its tax code, and the American people collectively underpay their taxes by hundreds of billions annually. Much of the so-called tax gap results from people underreporting non-wage income, such as from sole proprietorships or business partnerships. (Regular wage earners typically have their income reported directly to the IRS and federal income taxes are deducted from their paychecks.)

Since there’s so much tax noncompliance, including through willful evasion, stricter IRS enforcement more than pays for itself. Investing $80 billion in the IRS would yield $207 billion in revenue over 10 years, according to the Congressional Budget Office.

Sen. Mike Crapo (R-Idaho), the top Republican on the Senate tax committee, has said making people pay taxes they already owe is tantamount to raising their taxes. And he argued this week in a press release that the proposal would unfairly burden people with lower incomes, since congressional tax analysts have estimated that people earning less than $100,000 are responsible for a major portion of unreported business income.

“Referring to all tax gap and misreporting numbers as arising from ‘tax cheats’ is misdirection, as significant amounts arise from hard-working taxpayers simply struggling to comply with an overly complex tax code, which will become even more complex if the latest tax-and-spend bill becomes law,” Crapo said in the statement.

Tax experts agree that some of the tax gap comes from ambiguities in the tax code and from honest mistakes, but they don’t agree that increased IRS enforcement would be a bad thing.

Marc Goldwein, an economist with the Committee for a Responsible Federal Budget, said getting people to pay what they owe is not the same as raising their taxes.

“Every single president from Ronald Reagan to Donald Trump has supported more IRS funding to close the tax gap,” Goldwein said.

The main tax increase in Democrats’ bill is a 15% minimum tax on the 200 or so corporations with profits in excess of $1 billion, projected to raise an estimated $313 billion over a decade. Economists have said some part of the corporate tax burden gets passed on to workers instead of shareholders, leading Republicans to describe any corporate tax hike as a tax on workers, even though it’s not a direct tax increase on households.

Republican sympathy for potential tax evaders stands out in light of longstanding Republican support for stricter IRS enforcement against people claiming low-income tax credits, but it’s consistent with years of Republican antipathy toward the IRS itself. During the Barack Obama administration, Republicans railed against the IRS for alleged unfair treatment of conservative groups seeking tax-exempt status. (It turned out the agency had scrutinized liberal groups, too.)

Largely as a result of anti-IRS attitudes on Capitol Hill, the agency’s budget has fallen 23% since 2010, even as the IRS has taken on new responsibilities, such as distributing economic impact payments and child tax credit payments during the coronavirus pandemic.

The idea that tougher IRS enforcement would disproportionately burden people with modest incomes, however, is questionable, since the agency would probably want to prioritize audits that net revenue for the government. And the Treasury Department has estimated that the vast majority of unreported business income accrues to people earning more than $100,000 annually.

“The goal should also be to improve productivity and reduce the burden on compliant taxpayers,” said Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center. “If the IRS can use the funding to increase audits of people who are truly noncompliant and also increase the ability to audit successfully in the cases that involve more complicated tax issues, then I think it’s a win-win for the government and taxpayers.”

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