Last year, as part of the Inflation Reduction Act, Congress granted nearly $80 billion of additional funding to the IRS to combat taxpayer noncompliance. Then-nominee for IRS commissioner, Daniel Werfel, explicitly pledged not to expand tax audits on businesses and households making less than $400,000 per year.
But House Republicans, unconvinced by Werfel’s assurances and putatively seeking to protect middle- and low-income taxpayers, recently passed a legislative bill to repeal the additional IRS funding. And as the run-up to the presidential election in 2024 gathers steam, the general public should anticipate that many pundits and those in the media will routinely attack the IRS and, by extension, the Biden administration for policing taxpayers along the economic spectrum.
The question that emerges is whether the IRS — whose mission is, in part, to coax tax compliance — should be discriminatory in its enforcement practices and limit its audits largely to high-income tax taxpayers. The answer to this question — supported by three compelling rationales — should be a resounding no. The IRS’s enforcement efforts should cut across socioeconomic lines.
First, there is the issue of messaging. Tax laws are just that — laws. In other words, they are mandatory rules. Fox News recently critiqued a newly instituted IRS compliance measure regarding employee tip reporting, berating the agency for going after the economic jugular of waiters and waitresses. But the fact is that all income is required to be reported, including tips. If the IRS does not enforce such laws — and thus grants taxpayers tacit license to break them — that would set a terrible precedent.
Second, there is the important issue of revenue at stake. The reality is that most middle- and low-income taxpayers, relative to high-income taxpayers, are tax compliant because this category of taxpayers is largely comprised of salary wage earners whose income is subject to third-party tax information returns (i.e., Form W-2). However, not all middle- and low-income taxpayers are salary earners who receive third-party tax information returns; as such, these taxpayers are far more prone to be derelict in their tax reporting practices, resulting in a meaningful revenue loss — one that the nation should not willingly forfeit, particularly in the face of mounting deficits.
Third, tax revenues are the fuel that enables civil society to thrive. To that end, Sen. Rick Scott (R-Fla.) recently suggested that all taxpayers, even those at the lower end of the economic spectrum, should pay a minimum tax. For his stance, Scott was lambasted both by members of his own party and by Democrats. Without delving into the specific merits or shortcomings of the senator’s actual proposal, the fact is that he voiced a basic societal principle of democracy — namely, every taxpayer should have some “skin in the game” because citizenship comes at a price and should not be taken for granted.
Of course, middle- and low-income taxpayers should not be audited at a greater rate than high-income taxpayers, and they should not be expected to contribute the same amount of taxes or even the same percentage of their income as high-income taxpayers. Yet they should not get a free ride; rather, they should pay their legally mandated percentage of income and should be audited at a rate commensurate to that of high-income taxpayers to ensure that they do.
Across the economic spectrum, the IRS should have the latitude to cajole universal tax compliance and the liberty to audit all taxpayers without fear of political reprisals. Rich or poor, every taxpayer enjoys the fruits that this nation has to offer. The corollary should be true as well: No matter one’s economic status, every taxpayer should be tax compliant.
Jay A. Soled is a distinguished professor of taxation at Rutgers Business School and has extensively written, lectured, and testified before Congress on ways to close the tax gap.