As a former member of Congress, I couldn’t be more concerned about the Internal Revenue Service’s recent launch of Direct File. This pilot program will have the agency preparing the taxes of select Americans making under $125,000.
Over the years, the legislative branch has subjected the IRS to significant budget cuts. Despite modest increases in the past few years, the agency’s congressional credit line has remained nearly 20% below where it was in 2010 when adjusted for inflation.
The IRS promised Congress it would begin going after wealthy tax evaders if it upped this funding allotment. Congress obliged, providing the agency with $80 billion in funding in the Inflation Reduction Act.
But now, with Direct File, the IRS again is focusing on low- and middle-income Americans. Disappointing, but not surprising. For decades, the IRS has favored targeting Main Street.
A Syracuse University study of 2022 IRS tax audit data found that taxpayers in the lowest income bracket were five times more likely to face IRS audits than members of the highest income bracket. They received nearly double the audits they did in 2020. This is unacceptable.
The African-American community is among the hardest hit by this audit disparity. Responding to congressional pressure, the IRS acknowledged as much in May, stating, “Black taxpayers are audited at three to five times the rate of non-Black taxpayers.”
The IRS is not focusing on Wall Street for various reasons; some of which are easy to spot, others are institutional and more subtle. Primarily, however, focusing on Main Street presents the easiest way to maximize revenue for the federal government.
According to a recent National Bureau of Economic Research study, the richest Americans hide more than 20% of their earnings from the IRS. While legal, the wealthiest Americans can use various tactics not available to most Americans, from using high-priced lawyers to illegally offshoring their assets.
Low- and middle-income families do not have the same financial resources to evade the agency, so the IRS chooses the low-hanging fruit to meet its revenue-collection goals rather than seeking out the core cause of the problem.
Main Street is not the American economy’s problem; Wall Street is. The top 1% represents an astounding 28% of the nation’s total unpaid tax bill. In comparison, the top 5% has evaded more than $300 billion — more than half the revenue the IRS is currently missing.
Rather than devote more of its resources to targeting everyday families with Direct File, the IRS should follow through on its representations to Congress. It should use the new funding it received to strike at the core of the nation’s tax-gap problem — evasion from well-connected, wealthy Americans. While it might not be the agency’s easiest or most convenient undertaking, the IRS has succeeded in doing this before.
For example, in 2008, the IRS worked with the Justice Department to create an Offshore Voluntary Disclosure Program, which allowed tax avoiders to disclose their hidden offshore assets in exchange for immunity from prosecution. The initiative worked remarkably well, resulting in billions of missing revenue in the IRS’ hands. The same can be done today if the IRS gives this or similarly profiled initiatives a chance.
Main Street is tired of feeling disenfranchised by its government. It’s tired of the growing trends in U.S. income and wealth inequality and what it perceives as the scales of justice constantly getting tipped in the privileged class’ favor.
The IRS scrapping Direct File and focusing on wealthy tax evaders will not solve this problem overnight. It will, however, help restore Main Street America’s faith in the agency while getting to the root of one of the nation’s primary economic issues. hat’s aTn opportunity the IRS can’t afford to turn away.
Michael Arcuri, a Democrat, is a former member of Congress from New York.