House Republicans try to block new IRS rule designed to track tax rich evaders

Congressional GOP has reduced IRS funding in bid to protect wealthy from audits
Protesters march at the U.S. Capitol to encourage the release of then-president Donald Trump's tax records from the Internal Revenue Service. April 15, 2017. Photo: Majunznk/Flickr

First published by the American Independent Foundation

House Republicans on Wednesday tried to block the Internal Revenue Service from creating new rules that would allow the agency to crack down on tax evasion.

The GOP-led effort came during debate on a bill to avert a catastrophic default on the national debt.

The new rules would allow the IRS to collect information from banks and other financial service institutions on large transactions — a move that would help the IRS enforce existing tax law, especially against serial tax evaders.

Republicans, who nearly unanimously opposed the debt ceiling bill, used a procedural motion to try to add language barring Treasury Department funds from being “used to implement any new information reporting requirements on inflows or outflows of deposits and withdrawals in individual and business banking accounts and other financial accounts.” This gambit — known as a “motion to commit’ — failed 211-219 on a strict party-line vote.

They were upset about an effort by President Joe Biden’s administration and congressional Democrats to enforce tax law — a move experts say could bring in more than $100 billion in revenue already owed under existing rules. Their plan involves investing more in IRS agents and collecting data from banks on account transactions of over $600.

The proposed rules wouldn’t actually change anything about the U.S. tax code. Such a move would require an act of Congress. Rather, the rules are intended to increase transparency for wealthy Americans who, by playing a complex shell game, are able to hide millions of dollars in income from the Treasury Department to avoid paying their fair share in taxes.

But House Republicans said that such a move would amount to an unlawful invasion of privacy.

On Wednesday, House Minority Leader Kevin McCarthy called the proposed reporting rules a “bank account surveillance scheme,” and claimed the rules were “designed to target low- and middle-income earners, especially if you rely on tips to make your living.”

“I just voted to bar the IRS from spying on the bank accounts of millions of Americans,” Rep. Sam Graves (R-MO) wrote Wednesday evening. “They’ve got no business sifting through our private banking data and quite frankly, I don’t trust them to keep our information safe.”

“This is a massive invasion of privacy for millions of Americans,” Rep. Bill Huizenga (R-MI) wrote in a Sept. 13 press release. “This obscene proposal would allow the IRS to collect an unbelievable amount of financial data with little to no tangible benefit, while imposing significant compliance costs on our community banks, credit unions, and related financial institutions.”

In reality, banks would not have to report individual transaction details to the Treasury Department under the new rules — only account totals.

Chuck Marr, senior director of federal tax policy for the Center on Budget and Policy Priorities, told USA Today on Wednesday that the $600 threshold would ensure wealthy Americans can no longer manipulate the system to their benefit.

It’s hundreds and hundreds of billions of dollars a year of taxes that are legally owed and not collected at the IRS which has been decimated with a decade of budget cuts, and that has led to a plummeting of audit, particularly of high income people, to the point now where some the highest capital audit rates in the country tend to be in Deep South poor, Black, rural counties, which is obviously upside down. … You want to make sure the threshold is low enough so these people cannot divide up their money into multiple accounts.

A Treasury Department official said the rules were designed to “end to a two-tiered tax system, where ordinary Americans comply with their tax obligations, but many high-end taxpayers do not.”

Earlier this month, IRS Commissioner Charles Rettig wrote in a letter to Sen. Elizabeth Warren (D-MA) that the new reporting requirements would help ensure wealthy Americans pay their fair share in taxes. “The new data will provide the IRS with a lens into otherwise opaque sources of income with historically lower levels of reporting accuracy,” Rettig wrote in the letter, which was reviewed by CNBC.

While the number of tax returns has grown over the past decade, the IRS has struggled to do its job as a result of massive, Republican-led budget cuts to the tax agency starting in 2010.

Between 2010 and 2018 alone, the IRS lost 21% of its overall funding, including nearly a quarter (24%) of its funding to enforce tax law, according to the Center on Budget and Policy Priorities.

Over the same time period, the agency lost 31% of its operations staff, including more than a third (35%) of “revenue agents with the expertise to conduct audits of complex returns.” As a result, the overall audit rate has fallen by 45%, while the audit rate for corporations with more than $1 billion in assets is down 51%, and the audit rate for millionaires has dropped by a staggering 61%.

It’s estimated that the Treasury loses more than $600 billion annually in unpaid revenue as a result of the agency’s limited tax law enforcement budget.

And contrary to the GOP’s claims, having an adequately funded IRS would likely mean fewer audits for lower- and middle-income Americans, not more.

“The whole point is it will let the IRS target audits in a smarter way, so honest people are gonna be less likely to be audited,” Seth Hanlon, a senior fellow at the Center for American Progress, told The American Independent Foundation in April.

“People earning under $400,000 — as long as they’re tax compliant — are gonna be less likely to be audited. The audit rate for those earning under $400,000 won’t go up,” he added.