Republicans’ first bill makes tax fraud easier for high earners

Big hammer goes boom.

Republicans set the tone for their next two years running the House of Representatives by enacting legislation that would add $114 billion to the deficit over the next decade, according to the Congressional Budget Office.

The bill in question, passed by House Republicans on Monday, repealed new funding for the IRS that the government authorized last year as part of its Inflation Reduction Act. That funding—some $80 billion—would have gone to hire new staffers, upgrade technology, and generally strengthen enforcement. The goal of the funding was to reduce the estimated 13% of taxes that are annually owed but never paid to the government, equal to about $428 billion last year, or about a third of the federal deficit.

The IRS is now understaffed, overwhelmed, and barely performing its enforcement responsibilities. As a result, the tax department has focused more on the easier to audit tax returns of those making little money, as opposed to the more complex returns belonging to those making a lot. In 2022, for instance, people who qualified for the Earned Income Tax Credit—ranging from individuals who make $16,480 annually to a married couple with three children making $59,187—were six times more likely to be audited than anyone else. In 2012, the IRS audited nearly 50,000 tax returns reporting more than $1 million in income. In 2022, however, it audited just 7,710 such returns.

And since high earners have more opportunities to abuse the tax code due to deductions for financing a home and the treatment of capital income, more incentive to cheat, and more resources like lawyers and accountants, it is no surprise that they are the primary source of the tax gap. In 2019, the top 1% of earners failed to pay $163 billion, while the top 20% of earners—those households making more than $142,501—failed to pay almost $500 billion in taxes.

By investing more in the IRS, lawmakers expected they would see more action to enforce the law and close the tax gap. That’s why the Congressional Budget Office estimates that taking away the additional $80 billion in IRS funding will add billions more to the deficit.

Conservatives have cast the idea of enforcing the law as dramatic overreach. Many, including new speaker Kevin McCarthy, have promoted the false idea that the bill would lead to the hiring of 87,000 new IRS agents tasked with auditing returns. That’s a misrepresentation of a Treasury Department forecast of total hiring for the agency over the next decade. It’s a number that includes auditors but also customer service representatives, technologists, and back-filling empty positions.

Luckily for fiscal responsibility, this bill to cut IRS funding is unlikely to become law while the Democrats control the Senate and president Joe Biden is in the White House. But it is important context for the upcoming budget fights that will define the next year in Washington, D.C. Many Republican lawmakers have made clear they are gearing up to abuse the debt limit and risk a potential US default in order to cut spending on everything from science to Social Security. But when they grandstand about rising debt, don’t forget that simply enforcing existing tax law was a bridge too far.