Will Biden’s Plan to Reduce the Tax Gap by Increasing the IRS’s Budget Raise $300 Billion?

I—among many others—have called for more money for the Internal Revenue Service to enable it to collect even more money owed to the US Treasury. And I still was stunned by the enormity of President Biden’s proposal to boost the IRS’s budget by $80 billion over the next decade: an increase of more than 50 percent over the Congressional Budget Office’s baseline projections. Roughly three-quarters of the new funding would be allocated to enforcement and particularly to audits of the wealthy and big businesses.

The potential payoff, according to the Biden Administration: Over $300 billion of new revenues from fiscal year 2022 through 2031. That implies that for each additional dollar directed to the IRS, tax revenue would increase, on average, by about $4.

Sounds good, right? But is the number correct?

Based on CBO’s analysis and my own research with Jamie McGuire, a senior economist at the Joint Committee on Taxation, a 4-to-1 return on investment (ROI) for IRS enforcement seems reasonable, maybe even conservative—once the new audit programs are fully in place.

But all estimates are uncertain. What could cause actual revenue to differ from Treasury’s estimate?

How long will it take for the new programs to be fully in place? The IRS can’t absorb billions of additional dollars immediately. It takes as long as five years to hire and train a new employee to become an expert revenue officer; perhaps less than half that time if the IRS can lure mid-level professionals from their more lucrative private sector jobs. Experienced examiners will do much of that training, limiting their ability to audit the complex returns filed by the wealthy and big businesses.

Sophisticated computer algorithms can help detect fraudulent claims, but they also take time to develop. And the IRS must continue to update them with new information about taxpayers’ evasion strategies.

The new appropriations would increase incrementally—but in those ramp-up years the revenue yield will be less than $4 for each dollar of investment. The longer it takes the IRS to staff up and improve its detection capabilities, the lower the ten-year average return will be. If the average ten-year ROI is 4 to 1 and returns are low in the early years, then the yield must be greater than average in later years.

What are the components of the plan? Some years, the IRS has provided extensive detail on how the additional funding will be allocated among specific endeavors, including separate ROIs for each component. More detail from the administration would help support claims of high ROIs.

Can the IRS outgun the competition? It’s not enough for the IRS to increase audits; the audits must be productive too. In 2019, 38 percent of audits of large corporations ended up in the taxpayer’s favor. Was that because of poor targeting? Or was it because highly skilled tax advisers successfully framed their clients’ very aggressive tax positions as legal avoidance rather than illegal evasion? The IRS needs to figure out what’s happening so it won’t waste new funding.  

A related worry is that targeting wealthy individuals and corporations will encourage some to cheat even more to stay under the IRS’s radar. Catching them will require ever-more sophisticated detection skills.

How will multi-year budgeting work? Biden is proposing multi-year budgeting by removing part of the IRS’s budget from Congress’s annual appropriations process and making that portion of funding automatic. That’s a very smart move. The IRS needs to make long-term commitments for staffing and capital investments and must be able to pay the bills for, say, multi-year information technology projects that come due in later years.

But Congress could resist loosening its hold on the annual oversight of the IRS’s entire budget. And Appropriations Committee chairs may object if they lose power over even a portion of the agency’s funding.

Will Congress credit the IRS expansion for any revenue gains?

Congress has had the IRS on a starvation diet for over a decade. Its enforcement budget has taken the biggest hit, with funding slashed by 25 percent since 2010 (after adjusting for inflation) causing the audit rate to drop by half.

Increasing the IRS budget will raise revenues, but here’s the catch: current scorekeeping rules won’t count them as budget savings. Can Congress work around this constraint? I’m willing to bet that Congress will find a way if the will is there.

Regardless, one thing is certain. Increasing the IRS’s enforcement budget—especially combined with another Biden proposal to expand information reporting on bank transactions—will yield revenues far in excess of costs. And those savings will show up where it matters the most—an increase in actual federal revenues and a smaller deficit, than would otherwise be the case.

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