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IRS needs more than audits to find tax cheats, former chief says

WASHINGTON — The U.S. Internal Revenue Service needs additional tools beyond audits to find individuals and businesses that are underpaying their federal tax bills, a former commissioner of the agency told a congressional panel on Tuesday.

“Simply scaling up what the IRS does today will not produce the desired results,” Charles Rossotti said at a Senate Finance subcommittee hearing. “As important as audits are, currently, all of IRS audit activity only recovers about 2.5% of the tax gap.”

Rossotti, who was IRS commissioner from 1997-2002, said the agency requires more information about bank account flows for high-income taxpayers and upgraded computer systems that could process that data. That would help find income that’s earned through pass-through entities, such as partnerships, where there isn’t strong third-party reporting and taxpayers can more easily hide their money, he said.

Lawmakers are considering giving the IRS additional funding and authority to expand its tax enforcement operation. Agency watchdogs for years have raised concerns about falling audit rates and the potential for taxpayers to avoid paying.

President Joe Biden in his $1.8 trillion American Families Plan is proposing an $80 billion infusion for the IRS to increase its audit capacity and technological systems. Biden is also calling for banks to report information about bank account inflows and outflows for some taxpayers so that the agency can determine if earnings from businesses such as pass-through entities are underreported.

Rossotti has said that Biden’s plan to ramp up tax enforcement could easily raise about $700 billion this decade and possibly much more.

Democrats are also looking for ways to better determine if American corporations operating offshore might be be underpaying their taxes. Sen. Chris Van Hollen, a Maryland Democrat, and Rep. Cindy Axne, an Iowa Democrat, released legislation on Tuesday that would require large companies to disclose the profits, taxes, employees and tangible assets of their foreign subsidiaries. This information is already privately reported to the IRS, but the bill would make it public.

John Thune of South Dakota, the No. 2 Senate Republican, said he wanted to ensure that the IRS could effectively enforce the tax laws, adding that he’s worried about giving the agency more access to taxpayer data.

“Many Americans are concerned about the risk of government overreach,” Thune said. “More specifically, they’re concerned their local banks could turn into extensions of tax enforcement on behalf of the IRS.”

Democrats say a large-scale overhaul at the IRS is necessary to find the tax dollars that the agency isn’t collecting. IRS Commissioner Chuck Rettig, who was appointed by former President Donald Trump, told the Senate Finance Committee last month that the annual tax gap, the difference between what is owed and what is actually paid, could be $1 trillion, a figure that is much higher than previous estimates.

Republicans have disputed that number.

Sen. Mike Crapo of Idaho, the top Republican on the Finance Committee, asked Rettig on Tuesday for more details about how he arrived at the $1 trillion estimate.

The IRS found that there was $441 million in uncollected taxes between 2011 and 2013. That three-year estimate is the agency’s most recent data on the tax gap.

Barry Johnson, an IRS research official, said the next formal tax-gap estimate would be released next year, which would be calculated using an updated methodology using more artificial intelligence. He said the estimate would focus on the gap from the years 2014 to 2016, but would also include some figures for years up to 2019.

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