The average U.S. household is paying an annual surtax of more than $3,000 to subsidize taxpayers who aren’t paying all they owe, a new report from the Taxpayer Advocate Service found.
Reduced funding for the Internal Revenue Service has led to lower staffing levels and fewer audits, which has reduced the amount the IRS has been able to collect from taxpayers voluntarily or through enforcement, the Taxpayer Advocate, an independent branch of the IRS, said in its annual report to Congress on Wednesday.
The IRS recently estimated the tax gap — the difference between what the federal government is owed and what it actually collects — averaged about $381 billion in unpaid taxes from 2011 to 2013. That equates to roughly 14.2% of taxes never being submitted to the agency.
With approximately 122 million U.S. households in 2013, that adds up to each U.S. household effectively paying an average annual “surtax” of more than $3,000 to cover others who don’t pay their full tax bill. The report, which included suggestions for legislation, said this calculation was based on the assumption that the government is seeking to collect a fixed amount of revenue, leaving compliant taxpayers to pay more to subsidize noncompliance by others.
The report also found that the IRS is one of the lowest-performing federal agencies in terms of customer service. The agency answered only 29% of the 100 million telephone calls it got during the 2019 fiscal year.
That’s a problem not just for those wanting help filing taxes, but also those with more serious issues. People facing enforcement action — such as wage garnishment, bank levies or more — were not always able to reach the IRS to make it aware of hardships which could potentially free them from those levies.
The IRS has increased the online tools and assistance it provides to taxpayers. At the same time, other forms of live support, such as Taxpayer Assistance Centers, have dwindled.
The primary problem is that IRS has been struggling with a massive shortage of funding and an increased workload. Its budget has been reduced by about 20% since 2010, after adjusting for inflation. And the number of full-time employees has declined by about 22% during that time. Meanwhile it had to manage a sweeping overhaul of federal tax law. The agency’s future looks challenging too: A recent report from the IRS estimates that about 31% of its remaining workforce will retire within the next five years.
“The biggest issue the IRS faces is on the resources, being just underfunded for a long time. That shows up in customer service ... audits, the IT system is way out of date,” said Mark Mazur, director of the nonpartisan Tax Policy Center. “On all fronts they are under-resourced.”
Additionally, the Taxpayer Advocate report found, many taxpayers who file legitimate returns waited weeks or months for a refund in the last year because of a new fraud filter. The filter flagged and stopped the processing of nearly 1.1 million returns. But ultimately, its false positive rate was 71%, meaning that 71 out of every 100 returns whose refunds were stopped were eventually determined to be legitimate.
The IRS has faced criticism from its watchdog, the Treasury Inspector General for Tax Administration, and outside groups that it isn’t effectively auditing corporations and high-income individuals with complicated returns. IRS Commissioner Chuck Rettig has said he is focusing on improving IRS enforcement — in both criminal and civil cases — and has asked Congress for more money to staff these efforts.
Individuals face a 0.45% chance of being audited, while businesses are audited at a rate of 1.6%, some of the lowest audit figures on record, according to the IRS’ annual report released this month. Individual income taxes are the largest group of uncollected taxes before audits, representing about $314 billion, according to agency statistics on the tax gap.
Davison writes for Bloomberg. Sell writes for the Associated Press.