Democrats who want to spend more money than a reasonable government budget will allow often talk about “improving tax compliance” and the “tax gap,” suggesting that there really is enough money to pay for lots of new spending if only the tax code was enforced more aggressively.

A 2021 proposal to require financial institutions to report inflows and outflow for every account with at least $600 in or out in a year was estimated to raise $206 billion over the 2022-31 budget window, according to the staff of the Congressional Joint Committee on Taxation. However, the idea of scrutinizing small bank accounts for suspected unreported income ran into obvious political problems.

The JCT staff pointed out that more than half of the “tax gap” revenue was estimated to come from taxpayers with reported income between zero and $50,000. While it’s possible that the intense IRS scrutiny would catch well-off tax cheaters, it seemed just as likely that mandatory reporting of $600 in financial activity would ensnare moms selling crafts on eBay to help pay the family’s bills.

The “Inflation Reduction Act” just sent to President Joe Biden’s desk tries the “tax gap” trick again. This time the plan is to hire something like 87,000 new IRS agents and roughly double the agency’s budget by 2031. The $80 billion in additional IRS funding is assumed to bring in new revenue of $204 billion in by auditing people who underreport their income and collecting all the taxes that are due. This has sparked public anger and accusations from Republicans that the IRS will use its new resources to go after “families, farmers and the small businesses of America,” in the words of Sen. John Barrasso, R-Wyoming.

The truth is almost worse. The IRS currently has about 78,000 employees and more than half are eligible for retirement, expected to leave during the next five years. Bringing in new employees and training them on the wildly complex tax code is going to be a daunting challenge for an agency that has trouble just answering the phone.

Over the years, politicians in both parties have transformed the IRS from a tax collector to a benefits agency. Refundable tax credits such as the Earned Income Tax Credit and the Child Tax Credit require the agency to process returns for people who owe no taxes and paid no taxes but will get a check because they are eligible for the credits. These programs have been the source of tens of billions of dollars of “improper payments,” a broad category that includes fraud and identity theft as well as errors.

The Inflation Reduction Act adds a new category of tax credits for the IRS to administer: climate credits. Businesses will be able to apply for tax credits for a list of specific types of energy investments. The new IRS employees will have to learn the details of the sustainable aviation fuel, advanced manufacturing production and previously-owned clean vehicles credits, to name a few.

The new employees will also have a learning curve on the agency’s information technology systems. Some of the IRS computers still run on COBOL, a programming language from the 1960s.

The bottom line is that Congress wants the IRS to hand out money as much as they want the agency to collect it. Don’t expect $204 billion in new revenue to come rolling in.

Editorial by the Orange County Register (Calif.)
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