WASHINGTON, D.C. – U.S. Senator Angus King (I - Maine) is urging the Administration to increase funding for the Internal Revenue Service (IRS) in the President’s FY 2021 budget to assure that high-income taxpayers and households receive the same scrutiny as others in lower tax brackets. In a letter to Office of Management and Budget (OMB) Acting Director Russell Vought, Senator King advocated for the necessary funds to ensure that the agency has the resources it needs to enforce tax laws, reduce the federal budget deficit, and ensure fair treatment for all Americans. It was reported this week that the IRS is auditing individuals at the lowest levels in at least four decades, a statistic driven in large part by the agency’s depleted resources. In his letter, Senator King emphasizes that Americans who utilize the Earned Income Tax Credit (EITC) – a tax credit designed to help low-income taxpayers – are among the most audited individuals despite being responsible for a small percentage of unpaid taxes.

“The President and I agree that there is a ‘growing demand’ for ‘stronger compliance efforts’ to enforce our tax laws,” wrote Senator King in part. “Increased and better targeted enforcement has the potential to recover over $1 trillion in revenue over the next decade, and also will ensure that people of all income levels – including those who earn non-wage income – pay their fair share. I urge you to include substantial IRS funding increases targeted toward more fair and robust tax enforcement as you assist the President in preparing his Fiscal Year (FY) 2021 budget…

“The decrease in tax enforcement resources has led to declining revenues and inequitable audits.  As audits have fallen by nearly 50 percent, tax dollars collected through audits have declined by about 50 percent, as well.  Meanwhile, the IRS audits households claiming the anti-poverty Earned Income Tax Credit (“EITC”) more often than households within any other income band, except for those earning more than $1 million per year.  And, audits of the wealthiest in our Nation are falling fast: in 2011, 12.5 percent of individuals earning more than $1 million per year were audited – a rate that fell to just 3.2 percent last year…

“In comparison to audits of our wealthiest citizens, audits of EITC claimants are unproductive.  EITC overpayments comprise just six percent of the tax gap, while underreporting of business income accounts for 51.9 percent of unpaid taxes.  As I wrote to Commissioner Rettig in April, the IRS must immediately cease its disproportionate audits of EITC claimants, and must instead focus its enforcement efforts on those most likely to avoid their tax obligations.”

Senator King has consistently advocated for tax fairness for low-income Maine people. In April 2019, he met with met with tax professionals, advocates, and clients at Pine Tree Legal in Portland to discuss ways to help low-income Maine people navigate the complexities of tax season, and wrote a letter challenging the IRS to refocus its limited resources away from disproportionately auditing lower-income households who utilize the EITC. He is also a cosponsor of the Working Families Tax Relief Act, legislation that would provide tax relief for working people and families by expanding the Earned Income Tax Credit (EITC) and Childcare Tax Credit (CTC). The bill would benefit 400,000 Maine people, including 164,000 children.

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Acting Director Vought:

The President and I agree that there is a “growing demand” for “stronger compliance efforts” to enforce our tax laws.  Increased and better targeted enforcement has the potential to recover over $1 trillion in revenue over the next decade, and also will ensure that people of all income levels – including those who earn non-wage income – pay their fair share.  I urge you to include substantial IRS funding increases targeted toward more fair and robust tax enforcement as you assist the President in preparing his Fiscal Year (“FY”) 2021 budget.

To narrow the tax gap, the IRS requires increases in three budget activities: Enforcement, Operations Support, and Business Systems Modernization.  The President noted in his budget request last year that while the number of returns filed has increased by eight percent since FY 2010, IRS enforcement staffing has decreased by 19 percent.  During that same period, the President also noted that the number of returns examined fell by nearly half – from 1.65 million to 930,000.  The reason: since FY 2010, IRS enforcement funding has dropped by an astonishing 25 percent in real terms.

The decrease in tax enforcement resources has led to declining revenues and inequitable audits.  As audits have fallen by nearly 50 percent, tax dollars collected through audits have declined by about 50 percent, as well.  Meanwhile, the IRS audits households claiming the anti-poverty Earned Income Tax Credit (“EITC”) more often than households within any other income band, except for those earning more than $1 million per year.  And, audits of the wealthiest in our Nation are falling fast: in 2011, 12.5 percent of individuals earning more than $1 million per year were audited – a rate that fell to just 3.2 percent last year.

The President can exercise strong leadership by requesting that Congress methodically restore the IRS enforcement budget to its inflation-adjusted FY 2010 level.  To do so, I urge you to include a $425 million increase request in the IRS Enforcement budget activity for FY 2021 (for a total of $5.435 billion); announce the President’s intention to advocate for similar increases during each of the next three fiscal years; and demonstrate the President’s commitment to increasing IRS enforcement budget levels over the next decade.

By restoring and investing in the IRS enforcement budget, Congress and the President will accomplish two aims.  First, the federal government will collect substantially more revenue, and consequently will reduce the federal budget deficit.  By the President’s own estimate last year, $14.5 billion in IRS investment over the next 10 years would lead to a revenue recovery of $47.1 billion – and the President acknowledged that his estimate “likely understated” return on investment.  Academic sources have estimated that returning audit rates to 2011 levels would return approximately $715 billion in revenue to Treasury over the next decade.

Second, robust, well-targeted tax enforcement will actuate the progressivity that Congress, out of a concern for fairness, has built into our tax system.  Audits of high-income individuals, corporations, and estates often require more resources up front, but also return far more revenue to the Treasury than audits of lower income individuals do.  According to Treasury Inspector General for Tax Administration J. Russell George, an extra hour spent auditing someone who earns $5 million or more per year generates about $4,900. 

In comparison to audits of our wealthiest citizens, audits of EITC claimants are unproductive.  EITC overpayments comprise just six percent of the tax gap, while underreporting of business income accounts for 51.9 percent of unpaid taxes.  As I wrote to Commissioner Rettig in April, the IRS must immediately cease its disproportionate audits of EITC claimants, and must instead focus its enforcement efforts on those most likely to avoid their tax obligations.

To determine which taxpayers the IRS should audit, Congress and the President should prioritize funding for modernization of the IRS’s information technology (“IT”).  As you may know, the IRS’s Individual Master File – the IT program responsible for receiving data on individual taxpayers and issuing refunds – is almost 60 years old.  In an era when J.P. Morgan Chase invests $11 billion per year on technology, the IRS has annual modernization funding of just $180 million.

The IRS requires substantial additional funding both for operations support and for business systems modernization so that it can prevent a catastrophic IT system collapse and proactively identify productive returns for audit.  Specifically, I encourage you to include a $430 million increase request in the IRS Operations Support budget activity (for a total of $4.2385 billion) and a $170 million increase request in the IRS Business Systems Modernization budget activity (for a total of $350 million).  As with the IRS Enforcement budget activity, I urge the President to voice his support for increasing the critical Operations Support and Business Systems Modernization budget activities over the next decade.

The people of Maine and of the Nation deserve a fair and effective tax enforcement system.  I look forward to working with the President to narrow the tax gap, decrease the federal budget deficit, and preserve the integrity of federal revenue collection.