Lawmakers worry IRS is giving rich people a pass

Lawmakers on both sides of the aisle are raising concerns after an IRS watchdog found the agency has not addressed hundreds of thousands of high-income individuals who haven’t filed tax returns.

In a report released this past week, a government watchdog said there were about 880,000 high-income non-filers who, as of December 2018, still hadn’t satisfied a filing requirement, amounting to an estimated $45.7 billion in unpaid taxes. Compliance personnel at the IRS have not worked on many of these cases, the Treasury Inspector General for Tax Administration (TIGTA) said in its report about non-filers for tax years 2014-2016.

Lawmakers want the IRS to ensure that its enforcement efforts are fair across income groups. They’re now seeking information from the agency about its efforts to get high-income people to comply with their tax obligations.

“No one at any income level should ever think they are safe in cheating on their taxes,” Senate Finance Committee Chairman Chuck Grassley (R-Iowa) said in a letter Thursday to IRS Commissioner Charles Rettig.

Congress has long had concerns about the “tax gap,” the difference between the amount of taxes owed and the amount paid on time. The IRS says that high-income non-filers, while a small portion of the non-filing population, are responsible for a majority of the tax gap that is due to non-filing, according to TIGTA’s report.

The IRS defines high-income non-filers as those with income of at least $100,000 who have not filed tax returns.

“Intentional nonfiling of tax returns by those with significant financial resources and sophistication is a brazen form of noncompliance,” TIGTA said in its report, adding that the IRS needs to take more action to bring those individuals into compliance with tax laws.

In the group analyzed by TIGTA, about 327,000 were never flagged for potential further review and about 43,000 were shelved or otherwise taken out of the IRS’s inventory streams without any additional scrutiny. The remaining cases are in inventory streams but haven’t been resolved, and TIGTA said the IRS generally is not pursuing outstanding cases due to limited resources.

Key lawmakers on Congress’s tax-writing committees are worried about those findings, though their comments vary and reflect political affiliation.

Sen. Ron Wyden (Ore.), the top Democrat on the Senate Finance Committee, criticized Republicans for pursuing IRS budget cuts during much of the last decade, and said the agency needs more funding.

“As a result of Republicans’ years-long effort to gut the IRS and protect their donors from scrutiny, wealthy tax cheats stole nearly $46 billion in just three years by refusing to even file their taxes,” Wyden said in a statement. “What’s worse, the IRS did little to nothing to pursue these tax cheats.”

“Investments in health care, infrastructure and education will be perpetually short-changed if paying taxes is essentially voluntary for those at the top,” he added. “The IRS needs historic investments to address this crisis.”

House Ways and Means Committee Chairman Richard Neal (D-Mass.) said in a letter to Treasury Secretary Steven Mnuchin that the IRS needs more resources. He noted that the agency has said it is harder and more expensive to audit high-income taxpayers than low-income taxpayers, resulting in disproportionately higher audit rates for low-income taxpayers.

“The IRS must pursue noncompliance fairly across every income level,” Neal wrote. He asked Mnuchin to provide the Ways and Means Committee with information about Treasury’s plans to address the issues raised in TIGTA’s report.

Grassley noted in his letter to Rettig that the report looked at tax years that occurred during the Obama administration and that TIGTA’s review focused on a time period that predates Rettig’s tenure. Rettig is a Trump appointee who started in fall 2018.

Like Neal, Grassley said it’s important for IRS enforcement efforts to be fair across income levels.

Grassley asked Rettig for information about “how the IRS was aware of so many instances of taxpayer noncompliance without ever having attempted to collect from such taxpayers, or even prepared substitute returns for them based on the information received by the IRS alerting it to such noncompliance.”

Eric Hylton, commissioner of the IRS’s small business/self-employed division, said in a response included in TIGTA’s report that the issues highlighted “are reflective of the resource challenges the IRS has faced in recent years.”

He said the IRS has lost nearly one-third of its enforcement personnel since fiscal 2010, and that the agency’s budget proposal for fiscal 2021 calls for more money to beef up enforcement. Hylton added that recent budget increases allowed the IRS to hire more enforcement staff last year, but only to the tune of increasing compliance staff by 1 percent.

The IRS has increased resources to non-filer programs since fiscal 2018, Hylton said, and seen an increase in the amount of money collected from delinquent returns that have been secured. He also noted that the IRS this year has initiated in-person visits with high-income non-filers.

In his letter, Grassley asked Rettig for an update on how the IRS initiative to increase visits to high-income non-filers is proceeding, particularly in light of the coronavirus pandemic.

Mark Mazur, a former Obama administration Treasury official who now is director of the Urban-Brookings Tax Policy Center, said this week’s report signals “a long-term erosion of enforcement activities” that has manifested itself across the IRS.

He said it also raised questions about whether the IRS allocated its reduced resources in the right way, but nevertheless demonstrates the need for more IRS funding.

Mark Everson, who served as IRS commissioner from 2003 to 2007 and is now vice chairman of Alliantgroup, said the report highlights the negative effects of budget cuts to IRS enforcement.

The report makes clear that “there’s a significant upside in working more of these cases, and they need more resources to do it,” he said.