America's regressive middle-class wealth tax
IRS needs new technology so taxpayers pay their fair share
As the nation plunges into an unsustainable financial morass, essentially spending four dollars for every three dollars it collects, the government confronts a daunting choice. Congress must be willing to significantly raise taxes, drastically cut spending, or some combination of the two. So far it has proven incapable of crafting solutions to address our fiscal challenges. One measure that would help reduce the trillion dollar deficits would be to arm the Internal Revenue Service with the compliance tools necessary to force tax scoffers to pay their fair share.
This is not some loosely knit pipe dream. The size of the tax gap, or the difference between what taxpayers pay in taxes in a timely manner and what they should pay if they fully complied with the tax laws, is hundreds of billions of dollars every year. This monetary shortfall deprives the nation of much needed revenue. While fully funding the IRS would not eliminate deficits, it could make a measurable dent. In dictating whether the tax gap will grow or shrink, one unresolved yet critical question is about the role technology will play. Who is better positioned to capitalize on it? The government or those who would skirt the tax laws?
Technological advances portend opposing outcomes. On the one hand, they play a vital role in keeping some taxpayer predilections in check. Think of all the tax forms filed annually and used for verification purposes, and how offshore accounts have shed their erstwhile veil of secrecy. The use of cash is ebbing in favor of credit card and other payment means that leave electronic marks that are readily traceable.
On the other hand, technology presents novel avenues for taxpayers so inclined to cheat on their taxes. To illustrate, consider how bitcoin and other modern electronic currencies foster anonymity, an international economic landscape in which profits can readily be shifted from high tax jurisdictions to low tax jurisdictions, and a decentralized workforce epitomized by the gig economy in which taxpayers may readily mischaracterize their personal expenses as business expenses.
As far as tax compliance is concerned, in light of the advantages and disadvantages associated with technology, you might think that members of Congress would do everything in their power to position the IRS ahead of the curve. For much of the last decade, however, the legislative branch has unfortunately done the opposite by actually cutting funding to the one governmental agency that could help fill federal coffers.
If new technologies are responsibly deployed, including the institution of safeguards to ensure the government is not overly intrusive, the prospects for enhanced tax compliance would be promising. Utilizing artificial intelligence, researchers have developed algorithms that can detect tax shelter activity. These and other advances could yield billions of dollars of additional revenue without the need to raise taxes. They would also enable the IRS to make tremendous strides in augmenting the services the agency offers to taxpayers. Enhanced services generally result in more satisfied taxpayers and in turn greater tax code compliance.
Congress is grappling with IRS funding levels for the new fiscal year. The House would modestly augment its budget, while the Senate would hold it essentially even. We support an enhanced budget that will fully fund critically needed IRS information systems modernization. Doing so would help the agency fulfill its compliance mission and, just as importantly, restore a modicum of fiscal solvency to the federal government.
Mark Everson served as the commissioner of the Internal Revenue Service under President Bush and is now vice chairman of Alliant Group. Jay Soled is a professor of accounting and information systems at Rutgers University.