Biden’s Dream of an IRS Strike Team

He says more tax audits can recover $700 billion. Not even close.

WSJ editorial.

"When President Biden talks of bulking up the Internal Revenue Service, he must be fantasizing about some kind of SEAL Team 6 for audits. His plan is to put another $80 billion into IRS tax enforcement over 10 years, which the White House claims will raise $700 billion of revenue that’s being left on the table.

Not even close, according to a Thursday report by the Congressional Budget Office. The extra IRS funds, the CBO says, would probably produce only $200 billion. Blame it on a classic economic culprit, diminishing returns. Last year the IRS spent $12.3 billion and employed 75,773 full-time equivalents.

The CBO says Mr. Biden’s plan “would more than double the IRS’s staffing.” Yet the IRS naturally would “prioritize the enforcement activities that it thinks will have the highest average return; additional enforcement spending would therefore have lower return.” Econ 101.

In recent years, the report says, “a $1 increase in spending on the IRS’s enforcement activities results in $5 to $9 of increased revenues.” But squeezing juice from an orange gets harder all the time. The CBO says taxpayers “adapt to the IRS’s enforcement activities and adopt new ways of evading detection.” Delays also cut the revenue inside the budget window. Tax audits of “medium complexity” take 24 months, the CBO estimates, not counting legal appeals.

In fairness to Mr. Biden, the CBO didn’t analyze the pieces of his plan “that involve new information-reporting requirements.” But those are the pieces least likely to become law. Mr. Biden wants banks to file paperwork every year that shows the “gross inflows and outflows on all business and personal accounts,” subject to “a low de minimis gross flow threshold,” according to a Treasury report. Privacy lovers, gird your loins.

Economic guesstimates, including the CBO’s, are full of uncertainty. The IRS push could make taxpayers more scrupulous, in which case enforcement would be less productive, with more audits that turn up nothing. For another view, the Penn Wharton Budget Model says the IRS plan could raise $480 billion, which is still far less than Mr. Biden claims.

The hidden costs would include a whole lot of harassment of Americans who use entirely legal means to trim their tax bills. Fighting an IRS claim is arduous, even if you’re in the right. The latest annual report by the National Taxpayer Advocate shows outcomes in the 10 most-litigated areas. Taxpayers who had attorneys fought 171 cases. They won, at least in part, 23%. Some categories were near a coin flip: The IRS lost 43% on trade or business expenses and 44% on Schedule A deductions.

How many others with similar claims simply sighed and wrote the IRS a check, since it was too burdensome to fight? People should pay what they owe. But when government unleashes a bureaucracy with revenue goals in mind, the result will as often as not be unfair."