The gap between taxes owed and taxes collected by the Internal Revenue Service could be approaching $1 trillion, IRS Commissioner Charles Rettig told members of the House Committee on Oversight and Reform’s Government Operations Subcommittee as he advocated for more funding for the agency.
During an April 21, 2022, hearing of the subcommittee, Rettig noted updated tax gap figures for the three-year period of 2012-2014, along with projections through 2019, will be released this summer. However, those projections do not account for the growth in cryptocurrency, which could be widening the tax gap beyond the current calculations and projections.
“What is not in those estimates is virtual currencies, and there is over a $2 trillion market cap for virtual currencies,” Rettig testified before the committee. “Last year, there was over $14 trillion in transactions in virtual currencies and the United States, if you view relative GDP, is somewhere between 35 and 43 percent of that $14 trillion.”
He said that knowledge generated from John Doe summons activity in these space reveals “that the compliance issues in the virtual currency space are significantly low.”
“The tax gap estimates that the IRS prepares are based on information that the IRS is able to determine, not information that we know is out there but we are not able to determine,” Rettig said, adding that the agency is trying to get more information about virtual currencies through adding questions on the Form 1040, first on Schedule L and then moving it to page one of the Form 1040 last year “to try to enhance compliance.”
He added that the agency is looking to get more into that area.
The comments on the tax gap and the need to be able to tackle compliance in the cryptocurrency space underscores the agency’s need for more funding as requested in the White House budget request for fiscal year 2023.
In his written testimony submitted to the committee, Rettig noted that the agency “can no longer audit a respectable percentage of large corporations, and we are often limited in the issues reviewed among those we do audit. These corporations can afford to spend large amounts on legal counsel, drag out proceedings and bury the government in paper. We are, quite simply, ‘outgunned’ in our efforts to assure a high degree of compliance for these taxpayers.”
He wrote that it is “unacceptable” that corporations and the wealthiest individuals have such an advantage to push back on the nation’s tax administrator.
“We must receive the resources to hire and train more specialists across a wide range of complex areas to assist with audits of entities (taxable, pass-through and tax-exempt) and individuals (financial products; engineering; digital assets; cross-border activities; estate and gift planning; family offices; foundations; and many others),” his written testimony states.
Rettig wrote that the agency current has fewer than 2,000 revenue officers, “the lowest number of field collection personnel since the 1970s,” to handle more than 100,000 collection cases in active inventory.
He continued: “In addition to our active inventory, we have over 1.5 million cases (more than 500,000 of which are considered high priority) awaiting assignment to these same 2,000 revenue officers. We have classified roughly 85 percent of those cases as high priority, many of which involve delinquent business employment taxes.”
The lack of funding is also hampering criminal investigations.
“Much like other operating divisions in the IRS, CI is close to its lowest staffing level in the past 30 years. With fewer agents, we have fewer cases and fewer successful convictions,” he stated in the written testimony.
Much of this also is compounded by the ancient IT infrastructure at the agency, another reason Rettig advocated during the hearing for more funding.
“Limited IT resources preclude us from building adequate solutions for efficiently matching or reconciling data from multiple sources,” he wrote. “As a result, we are often left with manual processes to analyze reporting information we receive.”
Retting specifically highlighted the Foreign Account Tax Compliance Act, which Congress enacted in 2010 but, according to Retting, has yet to appropriate the funding necessary for its implementation.
“This situation is compounded by the fact that when we do detect potential non-compliance or fraudulent behavior through manually generated FATCA reports, we seldom have sufficient funding to pursue the information and ensure proper compliance,” he wrote. “We have an acute need for additional personnel with specialized training to follow cross-border money flows. They will help ensure tax compliance by improving our capacity to detect unreported accounts and income generated by those accounts, as well as the sources of assets in offshore accounts.”