The IRS says its 87,000 new hires could help raise up to $1 trillion while forcing tax evaders to pay. But will more “fire-breathing dragons” really do the trick?

The IRS says its 87,000 new hires could help raise up to $1 trillion while forcing tax evaders to pay. But will more “fire-breathing dragons” really do the trick?

Get ready, ultra-wealthy Americans: President Joe Biden wants you to start paying your dues.

Through the Inflation Reduction Act, Biden plans to increase funding for the IRS to help the agency catch sneaky tax evaders, especially high-income ones who like to find loopholes around the law.

A May 2021 Treasury Department report estimates that the extra cash would allow the agency to hire about 87,000 new employees, which could include revenue agents, customer service and IT personnel, by 2031.

Proponents believe increased funding could raise up to $1 trillion by forcing tax evaders to pay their dues, especially after years of budget cuts have gutted the system.

However, some critics fear that increased scrutiny over taxpayers could backfire in a big way.

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The IRS is in desperate need of support

The $80 billion in funding spread over the next 10 years will help the IRS modernize its infrastructure, increase enforcement, and replace its aging workforce (50,000 of the IRS’s 80,000 workers are expected to leave over the next five years).

The agency was reportedly underfunded by about 20% for a decade, leading it to cut back on both staff and technology upgrades.

Bogged down by a processing system that is more than half a century old and a backlog that includes millions of raw paper documents, the IRS needs more resources and support for some time.

Customer service was also woefully understaffed. During the 2022 filing season, the IRS received approximately 73 million phone calls from taxpayers, but only 10% were answered.

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“The combination of more than 21 million unprocessed paper tax returns, more than 14 million math error alerts, an eight-month backlog in processing taxpayer correspondence, and the extraordinary difficulty of reaching the IRS by phone has made this season particularly challenging filing,” said Erin, a national taxpayer advocate. M. Collins wrote in his midyear report to Congress.

In addition to these issues, former IRS Commissioner Charles Rettig estimated in 2021 that the agency is losing $1 trillion in unpaid taxes each year, mostly due to evasion by big, wealthy businesses. He also indicated that they could slip through the cracks in part due to the lightly regulated cryptocurrency market, foreign-sourced income, and abuse of pass-through provisions.

Rettig has long pushed for increased funding “to lure the fire-breathing dragons” to bring the hustlers to the task.

Could strengthening enforcement do more harm than good?

Proponents say the funding will help close the “tax gap” by helping catch more tax evaders.

Of a total of $80 billion, $45.6 billion has been earmarked for increased enforcement, which will go to hire more police officers, provide legal support and invest in “investigative technology” to determine who should and shouldn’t be checked.

But not everyone is thrilled with the news.

“They’re not going to get this ‘magic money,'” Brian Reardon told Bloomberg. Reardon is the president of the S Corporation Association, which represents small private businesses that pass taxes on to their shareholders.

“If you force enforcement on people who otherwise follow the rules and pay what they owe, you build resentment and anger. You undermine people’s trust in the tax system.”

However, the Biden administration says increased enforcement will focus on ultra-wealthy, large corporations and not target small businesses or families making less than $400,000 a year.

Research by the Treasury Department indicates that the top 1% of Americans may be evading up to $163 billion in taxes each year.

That said, while Eli Akhavan, a partner at Steptoe & Johnson in New York, expects audits to increase, he has told his wealthy clients that “they have nothing to worry about except a few headaches,” provided they stay following good advice and have their own “ducks in a row”.

“If there’s nothing to find, there’s nothing to find,” says Akhavan.

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This article provides information only and should not be construed as advice. Comes without warranty of any kind.

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