In 2021, Americans owed about $625 billion in taxes that they never paid. This number, called the “tax gap,” represented some 13.7 percent of all taxes due, and, had it been collected, it would have reduced the deficit by nearly one-quarter.
Getting more of that number collected is naturally an obsession of many tax and budget experts. It represents a way to fund government programs without raising taxes, adding to the deficit, or making other cuts. Deals like that can feel as rare as unicorns in the tax world. Funding the IRS in an effort to reduce the tax gap was one of the key ways Democrats funded their climate subsidies in the Inflation Reduction Act (IRA) of 2022.
The question is what share of that $625 billion could be realistically recovered. Even a perfectly resourced Internal Revenue Service would, after all, miss some tax evasion and misreporting. The Congressional Budget Office estimated that the IRS funding in the IRA would raise an average of $20.3 billion a year over 10 years, a small fraction of the $625 billion gap. For years, though, some economists have been vocally arguing that better enforcement could raise much, much more than that.
A new report released by the Treasury Department on Tuesday argues that those economists had a point, that we have been understating the revenue this new IRS funding will bring in. They argue that it will bring in over $170 billion more than they previously thought over an 11-year window and that, if Congress extends this funding for the IRS, the ultimate revenue gain could be more than double initial estimates.
The takeaway is that investing in the IRS could, if this study is accurate, be a better deal than we thought.
Why Treasury thinks it underestimated revenue from IRS funding
The increased revenue projected comes from a few different sources. One of the biggest is that Treasury is finding that marginal audits in recent years have been bringing in more money than anticipated. They had assumed that…
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