Sen. Mike Crapo (Idaho), the top Republican on the Senate Finance Committee, is asking IRS Commissioner Charles Rettig for clarity about his remarks that the “tax gap” between the amount of taxes owed and the amount paid could be about $1 trillion annually.
Crapo is seeking more information about the $1 trillion figure as President Biden is proposing to boost IRS funding in order to help pay for his economic recovery proposals, and as lawmakers also consider ways to reduce the amount of uncollected taxes.
The senator said that he is interested in working on a bipartisan basis on IRS funding and enforcement issues, but thinks it’s important that enforcement efforts aren’t overly invasive for taxpayers.
“I look forward to working with you and the Administration on those issues, ever mindful of the importance of protecting the rights and privacy of all taxpayers,” Crapo said in a letter to Rettig this week. “It would be a lost opportunity if discussions and advocacy turn into political exercises, and it would be detrimental if IRS efforts do not strike the appropriate balance between taxpayer responsibilities and taxpayer rights.”
During a Senate Finance Committee hearing last month, Rettig estimated that the tax gap could be around $1 trillion. That figure is much higher than the IRS’s estimate released in 2019 that the average annual tax gap from 2011 to 2013 was $441 billion. The agency estimated in 2019 that $60 billion of the gap would eventually be collected voluntarily or through IRS enforcement activities.
Rettig, who was appointed by former President Trump to a term that ends in 2022, said that he thinks the tax gap is higher than the past official estimates because those estimates did not focus on cryptocurrencies and income from foreign and illegal sources. He also referenced a study published in March that found that collecting all unpaid taxes from those in the top 1 percent of income would increase revenue by about $175 billion annually.
Crapo asked Rettig for information about how much of the potential $1 trillion tax gap is attributable to asset and price growth since 2011-2013, how much of the $1 trillion is attributable to cryptocurrency holdings and how much is attributable to unreported income from foreign sources and pass-through entities.
Crapo also raised questions about the study that Rettig cited about unpaid taxes from high-income individuals, which the White House also cited when proposing to provide the IRS with additional funding. He pointed to a commentary piece about the study, written by a Treasury Department official and an official with Congress’s Joint Committee on Taxation, that raised concerns that the study used assumptions that likely overstate wealthy individuals’ share of tax evasion.
The study Rettig cited “has not been adequately vetted, and it is premature for the IRS to place such emphasis on its findings,” Crapo wrote.
The White House has proposed giving the IRS $80 billion over 10 years for enforcement and other purposes. The administration estimates that the funding, along with increased reporting requirements for banks, could generate an additional $700 billion in net revenue.
Crapo said there could be some challenges in converting increased IRS funding into additional tax revenue.
“I look forward to working with you and the Administration in examining the efficacy of possible additional resources intended to collect more revenue from those who owe it,” he wrote. “As you know, tax gap estimates have always drawn interest because there appear to be significant resources available from enhancing compliance. Yet, actually realizing those resources from enhanced IRS funding has not always proven easy or transparent.”