$1.8 Trillion American Families Plan to Include $80B to Beef Up IRS Audits of High-Income Earners and Collect Unpaid Tax

Handcuffs and money on wooden table.
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President Biden will unveil his $1.8 trillion American Families Plan before Congress this evening. He intends to partially offset the cost of the plan with an $80 billion investment in the IRS, aiming to beef up enforcement against the wealthiest Americans.

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Portions of the funds will “revitalize enforcement to make the wealthy pay what they owe” rather than Americans with actual income of less than $400,000. This plan would raise $700 billion over 10 years, according to a White House fact sheet.

“Republicans have starved the IRS so it can’t go after wealthy tax cheats. I’ve called for a $100 billion investment to rebuild and strengthen the IRS in my #WealthTax bill — this $80 billion announcement from President Biden is a good first step,” Senator Elizabeth Warren tweeted.

According to the plan’s fact sheet, the funds set aside for the IRS are to address the “two-tiered system of tax administration in this country: regular workers pay the taxes they owe on wages and salaries while some wealthy taxpayers aggressively plan to avoid the tax laws.”

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“Those with the highest incomes generate income in opaque categories where misreporting rates can reach 55%. A recent study found that the top 1% failed to report 20% of their income and failed to pay over $175 billion in taxes that they owed. But today, the IRS does not even have the resources to fully investigate this evasion. As a result of budget cuts, audit rates on those making over $1 million per year fell by 80% between 2011-2018.”

The move has been hailed by a slew of economists and politicians, including Larry Summers, former Secretary of the Treasury under President Clinton, former director of the National Economic Council for President Obama and Harvard University economist, who said the plan could raise $1 trillion dollars in 10 years. “Deterioration in IRS enforcement effort & information gathering is scandalous. @JoeBiden plan would make our tax system fairer, more efficient & raise more revenue than scorekeepers now forecast — likely a trillion dollars over 10 years,” he tweeted.

Senator Angus King called it a “fantastic, commonsense move” in a tweet. “America is leaving hundreds of billions of tax dollars on the table each year because the IRS doesn’t have the resources to go after wealthy tax cheats — these funds will help ensure all Americans pay what they owe.”

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“We should be auditing rich tax cheats more than poor grandmothers who claim a kid as a dependent,” California Congressman Ro Khanna tweeted yesterday. “I’m happy to debate Republicans on this issue every day from now until 2022. It’s time we properly fund the IRS and make the rich pay their fair share.”

Khanna introduced a bill — the Stop Corporations and Higher Earners from Avoiding Taxes and Enforce Rules Strictly (CHEATERS) Act –in February that would raise $1.2 trillion in revenue in 10 years by imposing IRS auditing on the wealthiest corporations and individuals.

And Senator Dianne Feinstein tweeted, “I requested the administration take this action because cracking down on tax evasion by big companies and high-earners could raise at least $780 billion. It’s a smart investment.”

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Akhil Kumar, partner and chief compliance officer, Arch Global Advisors, tells GOBankingRates that President Biden’s proposal is a “calculated political move to go after high net-worth individuals that for the last several years have avoided paying taxes. There is an estimate that there is over $700 billion in tax revenue that can be generated from this group. How I look at it, the government could be getting up to a 10x return on every additional dollar sent to the IRS for enforcement.”

He adds that the proposed tax increase for the individuals making more than $400,000 a year described as high income earners can be “misleading. “Depending on where you live in the United States, $400,000 might not necessarily be high income, as the cost of living varies state by state. For example, a family of 4 living in New York City will need every penny of the $400,000 income to be able to support a mortgage, taxes and living expenses, compared to the same expenses if they were residents of a different part of the country.”

However, some observers decry the plan in its totality, saying that an increase in funding to audit high earners will find that the rich, or those earning more than $1 million, “don’t cheat because they don’t have to cheat,” according to Tom Wheelwright, CPA and author of “Tax-Free Wealth.”

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“The tax law is set up as a series of incentives and the rich know where to find the incentives. My experience is that most of the actual cheating goes on at the lower income levels, especially small businesses that operate through Schedule Cs (sole proprietors),” Wheelwright tells GOBankingRates. “A better use of the IRS’ funding increase would be to provide better customer service to give the public a sense of fairness in the system. Less than 20% of calls to the IRS are ever answered, and even tax professionals have a difficult time getting someone to answer a simple question.”

Biden’s plan would also require financial institutions to report information on account flows so that earnings from investments and business activity are subject to reporting, like wages already are. In addition, further resources would focus on large corporations, businesses, estates and higher-income individuals. “Altogether, this plan would raise $700 billion over 10 years,” the White House fact sheet states.

The IRS budget has decreased by nearly 15% since 2011, and its enforcement budget has dropped by 25% during this period, according to a research report by Summers and Natasha Sarin, Biden’s deputy assistant secretary for economic policy at the Treasury. “Because of this decrease in enforcement resources, today the IRS has fewer auditors than it had at any point since World War II,” they say in the report.

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About the Author

Yaël Bizouati-Kennedy is a former full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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