By Richard Rubin 

WASHINGTON -- Tougher tax enforcement is one of the least controversial pieces of President Biden's economic agenda, a way to raise revenue without raising taxes. As the Biden plan advances, there are crucial open questions on how much money it will generate and how well the Internal Revenue Service will implement it.

The administration has said its multipronged approach -- costing $80 billion over a decade for enforcement staff, technology and information-gathering from Americans' bank accounts -- could net $700 billion.

The Biden administration's search for a bipartisan deal to finance about $4 trillion in infrastructure spending, family benefits and other priorities is leading lawmakers to focus on tax enforcement. While Republicans aren't fully sold on the administration's IRS plan, they aren't implacably opposed to the general idea. House Speaker Nancy Pelosi (D., Calif.) said the topic came up when Mr. Biden met top congressional leaders Wednesday as Republicans repeated their opposition to raising taxes on corporations and high-income households.

"So what other pay-fors are there?" Mrs. Pelosi said Thursday. "Some other sources of funding include the people who are not paying taxes," she added.

The IRS, shrunken after years of flat budgets, would face serious challenges hiring and training skilled workers and reversing declining audit rates. Once legislation is written, official congressional estimates could be more conservative than administration projections, and lawmakers are still figuring out where they agree.

"There's real money here," said Rich Prisinzano, director of policy analysis at the Penn Wharton Budget Model, a research group that estimates that the administration's plan could produce $480 billion over a decade and another $879 billion in the five years after that.

"Whether it's $700 billion or $500 billion in 10 years is unclear," said Mr. Prisinzano, who is less sanguine about the deterrent effects of tax enforcement than the administration is. "It's definitely more than $1 billion."

The threshold question is this: How much money is there? How big is the tax gap, the difference between taxes owed and taxes collected?

That is notoriously difficult to answer as researchers seek to measure what is often purposely hidden. Officially, the IRS projects the gap at $441 billion annually for the tax years 2011 through 2013 and $381 billion after counting revenue from enforcement efforts. That represents an 84% voluntary compliance rate and an 86% rate after enforcement.

Given inflation, the tax gap is higher now, but there are no official estimates. The administration's plan, using estimates from career Treasury Department staff members, assumes that it is more than $7 trillion over a decade and that 10% of that would be collected.

IRS Commissioner Charles Rettig told Congress last month that the gap could be nearing $1 trillion annually. He has cited increasing use of cryptocurrency to hide income as well as a paper from IRS and academic authors saying the top 1% of taxpayers hide more income offshore and through complex partnership structures than previously thought.

A new rebuttal from economists at the congressional Joint Committee on Taxation and the Treasury Department -- not writing in their official capacity -- argues that the original paper overstates noncompliance. That paper's authors are working on a response and say their initial estimates might underestimate tax evasion.

Sen. Mike Crapo (R., Idaho), the top Republican on the Finance Committee, said he wanted to better understand the estimates first.

"I want to find out what the true tax gap is, why that tax gap exists, what are the causes of it, and I'm fully willing to try to find some ways to address that," he said.

There is little dispute that additional enforcement -- more audits, more collections staff -- would produce more revenue than it costs.

The Congressional Budget Office said last year that a $40 billion, 10-year expansion of IRS enforcement would yield $63 billion to pay for other initiatives. The administration's proposal would add $80 billion to the IRS over a decade, doubling the enforcement staff and generating $240 billion and even more beyond the 10-year budget window, according to the Treasury Department.

Estimates depend on assumptions about how fast the IRS can hire and how long it takes for employees to operate at full strength. Once that happens, audits take time, and high-income taxpayers and businesses can fight, creating a lag before money hits government coffers.

That lead time means there is plenty of room to increase enforcement before experiencing diminishing returns, Mr. Prisinzano said.

The IRS needs more people but also a change in approach, said former commissioner Charles Rossotti. Nina Olson, the former national taxpayer advocate, said the IRS needs to improve service to help taxpayers who want to comply but struggle to do so.

"If you just scale up what they're doing now, it's so inefficient that you're never going to get a big result," Mr. Rossotti said.

At a hearing this week, Sens. John Thune (R., S.D.) and Steve Daines (R., Mont.) said Republicans were open to discussing more IRS resources.

"Any increase to the agency should come with commensurate accountability and transparency," Mr. Thune said.

What is harder to figure out is how much money could come from requiring banks and payment-system providers to report annual flows in and out of accounts. That is the second major prong of the Biden proposal; the administration says it yields the remaining $460 billion for a total of $700 billion.

The basic idea: When taxpayers know the IRS has more third-party information about their finances, they are more likely to be compliant.

Republicans are starting to resist such a requirement.

"Most Americans would reject the notion that we should let those who we deal with in financial transactions disclose our personal private, privacy information," Mr. Crapo said.

Also, the information would require significant analysis and interpretation.

While a W-2 is easy to match against tax returns, the annual difference between money coming into a bank account and going out isn't necessarily income. It could just be a first indicator for the IRS.

"It's not a perfect lens, and we don't think that we're going to close the entire tax gap," Kimberly Clausing, a deputy assistant Treasury secretary, said at a conference Thursday.

This money wouldn't just come from the wealthiest households but from a broader cross-spectrum, including small-business owners who underreport income.

Moreover, the IRS would need to digest the large new data stream and use it to determine who should be audited.

"Each of those iterations requires the absorption and the processing and the editing of that information," said Janet Holtzblatt, a former CBO official now at the Tax Policy Center, a project of the Brookings Institution and the Urban Institute. "In the past, the IRS has not quickly gotten through that first stage."

--Andrew Duehren contributed to this article.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

May 14, 2021 09:14 ET (13:14 GMT)

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