May 20, 2021 - Economy

Treasury releases plan to close the "tax gap" to raise revenue

Illustration of hands placing coins into an arrangement creating a one hundred dollar bill

Illustration: Annelise Capossela/Axios

The Treasury Department on Thursday unveiled new tax compliance measures that it estimates will raise an additional $700 billion in tax revenue over the next decade, before raising $1.6 trillion in the second decade.

Why it matters: The initiatives are part of President Biden’s American Families Plan agenda and they aim to close the “tax gap” between what the government is owed and what is actually paid.

  • Treasury analysis puts that gap at $600 billion in 2019 and suggests it will balloon to roughly $7 trillion through the next 10 years.

The new IRS compliance agenda includes:

  • Investing nearly $80 billion in additional IRS resources over the next decade to focus on things like modernizing technology, improving data analytics, and hiring and training agents dedicated to complex enforcement.
  • Improving IRS access to third-party reports, including those from financial institutions that could help uncover unreported income streams — helping to deter tax evaders.
  • Building a technological infrastructure designed to focus on developing machine learning capabilities, providing protection against cyberattacks, and improving external communication with taxpayers.
  • More oversight and stepped-up penalties for evaders — or those who help them, like unregulated tax preparers who may not be providing accurate guidance to their clients.

The $700 billion figure is on the conservative side, Treasury officials said. The impact of deterrence could help nudge the figure higher.

Eye-popping stat: The IRS has the oldest technological infrastructure in the U.S. government. It uses a programming language called Cobol, which is no longer taught and expensive to maintain.

  • "The lack of a modernized technological infrastructure means that the IRS doesn't have the tools it needs to effectively meet the challenges of the day," an official said.

Of note: The IRS' plan to use third-party reports from financial institutions as a reference for audits will focus on individuals making more than $400,000 per year, officials said.

The bottom line: The Biden administration is under pressure to find ways to pay for its ambitious American Families Plan and American Jobs Plan. This is one piece of that puzzle.

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