On May 20, the United States Treasury Department released a report on a set of tax compliance measures to increase fairness in the tax system and foster a tax system where Americans pay the taxes they owe. These measures are part of US President Joe Biden’s recent proposals in the American Families Plan, with the goal of advancing comprehensive and necessary investments in American children and families.

The report describes the President’s tax compliance initiatives that seek to close the ‘tax gap’—the difference between taxes owed to the government and actually paid. According to Treasury analysis, the tax gap totalled nearly $600 billion in 2019 and will rise to about $7 trillion over the course of the next decade if left unaddressed—roughly equal to 15% of taxes owed.

The US President’s compliance agenda has several elements:

  1. Provide the Internal Revenue Service (IRS) the resources it needs to address sophisticated tax evasion. The first step is a sustained, multi-year commitment to rebuilding the IRS, including nearly $80 billion in additional resources over the next decade. The IRS would grow manageably (no more than around 10% annually) but also have certain funding in place to make investments with large fixed costs—like modernising information technology, improving data analytic approaches, and hiring and training agents dedicated to complex enforcement activities. This would make up the ground that the IRS has lost over the last decade.
  2. Provide the IRS with more complete information. This is done by requiring financial institutions to submit additional information on total account outflows and inflows on top of existing reporting on bank accounts. There are no added requirements for taxpayers. The IRS will be able to deploy this new information to better target enforcement activities, increasing scrutiny of wealthy evaders and decreasing the likelihood that fully compliant taxpayers will be subject to costly audits. As a result, voluntary compliance will rise through deterrence as would-be tax evaders realise that the IRS has an additional lens into previously unreported income streams.
  3. Overhaul outdated technology to help the IRS identify tax evasion and serve customers. The IRS still relies on Individual and Business File Systems that date back to the 1960s—the oldest in the federal government. The result is decades upon decades of tax administration built upon a system that is written in a programming language that is no longer taught, and where new functions are added in a patchwork rather than integrated manner. Modernisation funding would allow the IRS to address technology challenges and develop innovative machine learning that can be deployed to better identify suspect tax filings. These resources would also support efforts to meet threats to the security of the tax system. With a revitalised IRS, this helps improve taxpayer service and communication and ensure that the IRS is able to effectively and efficiently deliver tax credits to eligible families and workers.
  4. Regulating paid tax preparers and increasing penalties for those who commit or abet evasion. Taxpayers often make use of unregulated preparers who lack the training to provide accurate tax assistance. These preparers submit more returns than all other preparers combined, and taxpayers rely on their guidance, in part because of challenges in reaching the IRS in a timely manner when questions arise. In addition to the regulation of paid preparers and service improvements that would simplify tax filing, the US President’s proposal includes additional sanctions for so-called “ghost preparers” who fail to identify themselves on the tax returns which they prepare.

The report argues the magnitude of the tax gap means that compliance initiatives have the potential to raise substantial revenue, and these reforms also improve tax progressivity and economic efficiency. Experts at the Treasury Office of Tax Analysis estimate that these initiatives would raise $700 billion in additional tax revenue over the next decade. It notes that while roughly 99% of taxes due on wages are paid to the IRS, compliance on less visible sources of income is estimated to be just 45%.

Download the report


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