Washington, D.C. — Today, Business Forward Foundation issued a new report, Closing America’s Tax Gap, that explains how modernizing IRS systems and enforcement could help the U.S. Treasury improve customer service and collect hundreds of billions in unpaid taxes each year. IRS modernization reforms, which have been endorsed by former IRS commissioners under both Republican and Democratic presidents, are likely to be incorporated into the Biden Administration’s next reconciliation bill.
The U.S. “tax gap” — the difference between what is paid and what is owed in federal taxes each year — has grown to approximately $600 billion, which is roughly enough to rebuild our transportation infrastructure or pay for child care and paid leave for ten years. U.S. Treasury officials estimate that their proposed reforms could help collect an additional $2.4 trillion in revenue over the next two decades.
“The vast majority of Americans pay what they owe, but the few who evade taxes cost us a lot,” said Elizabeth Fairchild, Executive Director of Business Forward Foundation. A family in the top 1 percent earns 12 times more than the median-income family, but underreports 34 times more. Overall, the wealthiest 1 percent of households in the U.S. accounts for 28 percent of the current tax gap. “Instead of raising taxes on those already paying their fair share, or cutting spending on priority policies like infrastructure, Congress can pass reforms that ensure America’s wealthiest families pay what they owe.”
The issue brief illustrates three reforms that would work in tandem to close the tax gap and also improve the IRS’ operations like customer service. The first recommendation is to increase the amount of third-party reporting for opaque streams of business income that have high misreporting rates. The second recommendation is to modernize the IRS systems by investing in new technology that would decrease unnecessary audits in favor of more targeted ones. The third reform is to increase funding in order to make up for a decade of budget cuts. This would allow the IRS to hire more specialized auditors and improve customer service.
“Budget cuts have hobbled the IRS,” said Fairchild. “The IRS has roughly the same number of employees today as it did in 1970 — even though the population has grown by 62 percent. The result is that the IRS doesn’t have the resources to identify, let alone pursue, sophisticated tax evasion.” But it’s not just the auditing process that needs to be modernized, she explained, “The IRS is also incapable of dealing with taxpayer questions.” In 2019, the IRS was only able to answer 29% of the 100 million calls it received. “Closing the tax gap means better service, more transparency, and less hassle for compliant taxpayers.”
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The Business Forward Foundation is an independent research and education organization that takes a business-minded look at policy issues affecting America’s economic competitiveness. Our work combines insights and advice from business leaders across the country with rigorous policy analysis. Through white papers, issue briefs, conference calls, and other events, we educate policy makers and the public about climate change, immigration reform, infrastructure investment, the future of work, and other critical issues.