- Thirty-eight percent of tax audits of corporations with assets exceeding $10 million ended in no change to tax filings in 2019, an 10% jump since 2010, a Tax Policy Center report said.
The Internal Revenue Service (IRS) budget for tax enforcement — the largest of its appropriations accounts — shrunk 25% from 2010 through this year, the report said, noting that the “no-change rate” for individual income tax payers was just 11% in 2019.
“To outside tax experts, the reason for the high rate of no-change audits is obvious,” the report said, adding that “the IRS, with its constrained budget and reductions in staff, can’t compete with the big accounting firms and high-priced law firms that bring sophisticated models and highly-paid tax professionals to the battle.”
The Biden administration this month proposed a 10.4% increase in the outlay for the IRS, including a $900 million increase in the budget for enforcement focused primarily on corporations and wealthy taxpayers.
The proposal “makes sure that corporations actually pay what they owe,” Treasury Secretary Janet Yellen said in a statement. Yellen is also one of the administration’s chief advocates for an increase of the corporate tax rate to 28% from 21%.
Sen. Elizabeth Warren (D-Mass.) is planning to propose legislation that would add to Biden’s proposed IRS appropriations and create mandatory, multi-year funding for enforcement.
"Even as the wealthy and corporations engineer increasingly creative tricks to game the system, the IRS is forced to play catch-up with an enforcement staff that’s now 30% smaller than it was 10 years ago," Warren said at a Finance Committee hearing on April 13. Money lost to tax evaders is “money we’re leaving on the table under current law, money that could be invested in childcare, education, a whole bunch of other priorities.”
IRS Commissioner Charles Rettig testified at the hearing that the agency lost about 17,000 enforcement staff during the past decade and could annually onboard about 5,000 to 7,000 new staff.
Mandatory funding would “absolutely” help the IRS revive enforcement, Rettig said.
"Mandatory, consistent, adequate, multi-year funding allows us to plan appropriately," he said. “Every time we go into hiring, we have a concern whether we can actually feed those folks next year.”
The IRS needs more than funding, according to the report released by the Tax Policy Center. “The IRS should have more flexibility to determine how to best hire and train examiners and to develop more sophisticated models to catch up with the tools used by corporate tax advisers.”
The IRS is trying to reduce the no-change rate by using more data analytics, updating detection models and giving greater weight to risk factors, the report said. “This isn’t just about increasing audits — it’s about increasing productive audits and lowering that no-change rate.”