Often lost in the debate over whether taxes should be increased or decreased is the fact that we can raise some revenue by doing a better job of enforcing current tax laws. A report issued earlier this month by OMB Watch explains that a lack of funding for tax enforcement by the IRS is costing us money and contributing to the "tax gap," the difference between the amount of taxes owed and the amount actually paid each year. The IRS has estimated that in 2001, $345 billion in taxes due was not collected on time, and around $290 billion of that was never collected. This means that taxpayers who comply with the law are in effect subsidizing those who do not.
The report, Bridging the Gap: The Case for Increasing the IRS Budget explains that IRS staff have been cut back since 1995 and that cuts have been especially severe among the staff who perform audits. Partly as a result of this, the number of audits is down, particularly for those with incomes over $100,000 and for large corporations -- the very types of audits that usually uncover the most in unpaid taxes. The amount of time spent on each audit has decreased and the audits are less often uncovering unpaid taxes, even though the tax gap remains a major problem.
Meanwhile, the report explains, Congress has instructed the IRS to crack down on EITC recipients (even though incorrect EITC payments account for only 3 percent or less of the tax gap) and has funded a private debt collection program that doesn't collect nearly as much money as IRS staff can collect at a given funding level.
The report argues that this situation can be turned around by increased funding for IRS enforcement, improved quality of audits, eliminating private debt collection and focusing more on assisting low-income taxpayers so that they can avoid errors in the extremely complicated EITC application process. Congress should pay serious attention. Increasing the IRS budget is one of the few opportunities lawmakers have to immediately raise revenues by spending money.