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To Help Taxpayers, Congress Should Fund the IRS and Save Direct File
The arguments against an improved IRS are motivated by private corporations worried about their profit margins and by anti-government activists seeking to undermine the public’s trust in the agency.
Dec 17, 2024
As Congress negotiates a bill for federal funding during the lame-duck session, lawmakers would be wise to remember that stripping funds from the Internal Revenue Service costs more than it saves. On the table in the appropriations bill is a $20 billion recission of funds to the nation’s tax administration. While this may look like a spending cut, it will increase deficits by $46 billion due to a drop in the agency’s capacity to enforce taxes on wealthy individuals owed under existing federal law.
At the same time, congressional Republicans are calling on the incoming Trump administration to end the popular program that allows taxpayers to file their returns for free directly through the IRS. This will ultimately lead to more costs for taxpayers as they pay private services such as Intuit or H&R Block to carry out paperwork that they are required by law to file each year.
Regular taxpayers benefit from a competent and well-funded IRS. Most people do their best to pay their taxes accurately and on time, and slashes to funding that leave the agency understaffed and underequipped only create headaches for compliant taxpayers. Until recently, the IRS was not given the funding and capacity to pursue the high-income taxpayers who have the most complex returns but who also account for a hugely disproportionate share of the tax avoidance, which unfairly shifted the agency’s scrutiny to everyone else.
The arguments against an improved IRS are motivated by private corporations worried about their profit margins and by anti-government activists seeking to undermine the public’s trust in the agency.
Upcoming Appropriations Bill Will Cut Billions from the Agency if Congress Does Not Act
Congress must appropriate funding to each federal agency every year, even when that funding has already been authorized through prior legislation. When Congress cannot come to an agreement on funding levels, they frequently pass “continuing resolutions,” which generally keep funding at its current level to prevent a government shutdown.
To help rebuild the agency after a decade of cuts in its annual appropriations, Congress provided an additional $80 billion in the Inflation Reduction Act to supplement its annual appropriations for 10 years. Most of this money is for tax enforcement targeting profitable corporations and the wealthy. That was unpopular among congressional Republicans, who sought to eliminate the additional funding during 2023’s debt ceiling negotiations.
Filing tax returns is required by federal law, and taxpayers should not need to pay money to a private company to hand over their private information to complete the service for them.
U.S. President Joe Biden signed the IRA into law but shortly after compromised with then-Speaker Kevin McCarthy (R-Calif.) and agreed to rescind $20 billion in funds over the upcoming two years as part of a deal to prevent the Republican-controlled House from driving the United States to default on its debts. The provision to cut those funds was included in the next year’s spending bill, negotiated between Republican and Democratic lawmakers. But rather than spreading the cuts over two years, all $20 billion was included in the first year—fiscal year 2024.
Now, Congress is likely to pass a continuing resolution that would extend funding levels from 2024. Without an agreement between lawmakers, this would include an additional $20 billion funding cut to the IRS that was not included in the initial Biden and McCarthy agreement.
This is bad for the federal deficit and bad for average taxpayers.
Congressional Republicans Also Want to Make it More Expensive to File Tax Returns
This year, for the first time ever, many taxpayers were able to file their taxes for free directly through the IRS as part of the Direct File pilot program. In past years, taxpayers were forced to either file by hand themselves or to use paid tax preparers like TurboTax, H&R Block, or Jackson Hewitt.
Taxpayers who used the Direct File program (which was only available in 12 states during its first year) were pleased with the results. The pilot program exceeded its goal for the number of users, and 90% of users rated their experience with the program as excellent or above average.
State governments were excited about the opportunity as well. Thirteen additional states are cooperating with the IRS to expand Direct File to include their state income taxes.
It makes sense. Filing tax returns is required by federal law, and taxpayers should not need to pay money to a private company to hand over their private information to complete the service for them.
But that is exactly what many congressional Republicans are now asking the incoming Trump administration to require of honest taxpayers. Twenty-nine Republican lawmakers signed a letter to the incoming administration asking them to end the popular program on “day one.”
Previously, the IRS attempted to persuade private companies to offer free filing services for taxpayers with relatively simple returns through a program called the Free File Alliance, and the companies participated for some time. But this arrangement did not always go as planned.
Some companies hid the free services from search engine results, and in TurboTax’s case, their parent company Intuit was eventually sued for deceptively leading taxpayers into paid services rather than the free services. Intuit eventually settled for $141 million.
Decade of Austerity Diminished the IRS’ Ability to Serve its Mission
Between 2010 and 2021, the agency’s budget was cut by a fifth and the number of revenue agents dropped by 35%. Meanwhile, the amount of tax returns filed grew by 13%, and the amount of tax returns filed by individuals making more than $500,000 grew by 70% from 2011 to 2019. As a result, the audit rate on these wealthy individuals dropped by more than 76%.
Although the IRS budget cuts were part of a larger campaign of government austerity following the Great Recession, the cuts put the federal budget in a worse position. The gap between the taxes that people legally owed and what they actually paid grew as high as $600 billion annually by 2021, more than half of that due to unpaid taxes from the top 5% of income earners.
Every hour spent auditing the returns of the most well-off families found $13,000 in unpaid taxes.
It wasn’t just the country’s fiscal situation that suffered from the assault on the IRS. Regular taxpayers trying to file accurate and timely tax returns found themselves dealing with an agency unable to meet the needs of the public. In 2022, The Washington Post reported on outdated and understaffed IRS processing facilities. IRS employees were in many cases using 70s-era technology and business processes. The Austin, Texas facility was so strained that its cafeteria became an impromptu document storage room.
The result was that the agency was failing. It was simply unable to answer calls, respond to letters, and issue swift tax refunds.
Recent Improvements to the IRS are Delivering Immediate Results for Taxpayers
The Inflation Reduction Act passed in 2022 reversed the decades of funding cuts to the IRS. The bill allocated $80 billion (now reduced to $60 billion and potentially even further) in funding to the agency to return its workforce to adequate levels, modernize its business systems and technology, and increase tax enforcement on big businesses and people making more than $400,000 a year.
The results were immediate. In prior years, the IRS had satisfactorily answered just 15% of phone calls. In 2023—the first tax year with the new funding—they answered 85%. That’s still too low by most standards, but a remarkable improvement. The agency also opened or re-opened 54 in-person centers to assist taxpayers across the country.
Positive Results for the Federal Budget, Too
The improvements to the IRS have delivered progress toward closing the tax gap as well. In 2023, the agency released a comprehensive strategic operating plan. In addition to improving taxpayer services, the document laid out the agency’s strategy for increasing audit rates on high-income individuals and complex business structures. While it may only take one auditor a few hours to review the tax return of a family claiming the Child Tax Credit, dissecting the tax return of a large S-corporation could be a years-long project for an entire team of auditors. So, the first step was to hire highly-skilled staffers and provide them with the best training and technology available.
This year, the IRS announced that it had collected $1.3 billion in unpaid taxes from millionaire households. In many cases, these were individuals simply not even bothering to file their tax returns. The agency had also begun leveraging modern technology like artificial intelligence to identify the most suspicious returns from large, complex partnerships.
If these funding cuts are passed, there will be thousands of fewer audits of wealthy individuals and large corporations. The latest estimates from the Congressional Budget Office show that an additional $20 billion recission in IRS funds will result in $66 billion in lost revenue, creating a $46 billion rise in deficits. That estimate tracks with a recent Government Accountability Office report that found every hour spent auditing the returns of the most well-off families found $13,000 in unpaid taxes. Cutting this funding is costly, not just for the honest taxpayers who will spend more hours waiting on the phone, but with direct increases in the federal deficit.
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Billionaires Buy Governments to Avoid Paying Their Fair Share in Taxes
In legislatures, the courts, and our executive offices, we have a system rigged in favor of the ultra-rich, rigged by everything from acts of Congress and judicial rulings to IRS budgets and audit policies.
Aug 03, 2024
By all appearances, former U.S. President Donald Trump has cut a sweet deal with a dozen or two of America’s richest billionaires: Finance his campaign and he’ll keep their federal taxes super low—or even lower them—once he’s sitting back in the White House.
How much do billionaires like this deal? This much: In April, hedge fund billionaire John Paulsen held a Palm Beach fundraiser for Trump that brought in $50.5 million. Immediately after Trump’s late May conviction on 34 felony counts in Manhattan, Timothy Mellon, the grandson of the classic plutocrat Andrew Mellon, ponied up $50 million. Miriam Adelson, the billionaire widow of Las Vegas kingpin Sheldon Adelson, appears eager to kick in as much as $100 million.
This past spring, meanwhile, billionaires Elon Musk and David Sacks reportedly held a secret dinner party for Trump, with attendees including the illustrious deep pockets Peter Thiel, Rupert Murdoch, and Michael Milken.
The rich themselves have actually become more brazen about avoiding taxes. Just try to stop us, they seem to be saying.
America’s billionaires clearly see politics as one route to ensuring they pay as little as possible at tax time. But they don’t just make their presence felt at election time. America’s rich have their thumbs firmly on the scale of all three branches of government. In legislatures, the courts, and our executive offices, we have a system rigged in favor of the ultra-rich, rigged by everything from acts of Congress and judicial rulings to IRS budgets and audit policies.
Some of this rigging we can all easily see. The dividends and long-term capital gains of the ultra-rich have for decades faced a maximum tax rate barely half the maximum rate applicable to other forms of income. And the investment income of the rich, unlike the paychecks of working people, faces no Social Security tax.
In 2017, the first year of the Trump presidency, intense lobbying efforts helped rich business owners to a special tax rate for their business income. In 2018 alone, according to ProPublica, that special rate translated into a $67 million gift to Mike Bloomberg, whose personal wealth now reportedly exceeds $100 billion.
But these glaring privileges the rich enjoy at tax time only tell part of the billionaire tax story. Other parts get precious little attention. In 2004, for instance, lawmakers in Congress enacted a penalty for the failure to disclose potentially abusive tax avoidance transactions on tax returns. The penalty on the surface looked substantial: 75% of the tax sought to be avoided. But Congress capped the penalty at $100,000, a move that turned the penalty into a minor nuisance for billionaires seeking to avoid millions of dollars in taxes.
In our current rich people-friendly tax climate, IRS staff who want to do the right thing face tough going. Recently, for example, one former IRS staffer, Michael Welu, went public with his concerns that the IRS itself has both official and unofficial policies that end up treating audited rich taxpayers much more gently than small business owners.
“I was putting butchers, bakers, and candlestick makers in jail,” Welu told the International Consortium of Investigative Journalists, “but the big stuff we really wanted to go after was being ignored.”
Welu found the upper management of the IRS division tasked with auditing the super rich—and the corporations they run—distinctly uninterested in investigating America’s richest and their “most egregious, ridiculous schemes” for avoiding taxes.
IRS officials like Michael Welu do occasionally speak out. But only tax wonks truly have any real sense of how much obscure tax code penalties and IRS audit policies favor the rich. And most of those tax wonks work for the rich.
The rich themselves have actually become more brazen about avoiding taxes. Just try to stop us, they seem to be saying.
Take the recently decided Supreme Court case, Moore v. United States. Working through an array of right-wing organizations, the conservative mover-and-shaker Leonard Leo attempted to use a challenge to an obscure one-time tax as a vehicle to preempt Congress from ever taxing the wealth or unrealized gains of the ultra-rich. Ultimately, the court decided the case without ruling on whether the rich can be taxed on their wealth or unrealized gains. But the opinions that four of the nine justices handed down made it clear that they stand prepared to do the billionaire bidding should a direct challenge to a tax on the wealth or unrealized gains of billionaires come before them.
Billionaires now have at least three Supreme Court justices firmly in their pockets. Reporting by ProPublica has revealed the massive gifts that have been flowing from Harlan Crow and other billionaires to Justice Clarence Thomas as well as the generous gifts that billionaire Paul Singer has been sending Justice Samuel Alito’s way. Justice Neil Gorsuch has had his entire career, including his appointment to the court, funded by the billionaire Philip Anschutz.
Those three justices, along with Justice Amy Coney-Barret, have now made it patently obvious they will not allow billionaires to be taxed on their unrealized gains or their wealth. Does anyone really think the billionaires won’t have the crucial, majority-making fifth vote from Justice Brett Kavanaugh when they need it?
Republican members of Congress are showing even less shame than our Supreme Court justices. Last year, these GOP lawmakers held the country hostage in negotiations to increase the country’s debt limit. Their price for agreeing to raise the debt limit, thereby avoiding a default on the country’s debt? They demanded—and won—a reduction in a scheduled IRS budget increase that would been used to increase enforcement moves against rich taxpayers.
The purported motive for this legislative hostage taking—“concern” over the federal deficit—made for an absurd justification. The proposed increase in the IRS budget would have been recovered, several times over, through increased tax collections. The IRS budget reductions the Republican lawmakers extracted will, in fact, only increase the federal deficit. But those reductions will serve a political purpose. They’ll protect the GOP’s richest patrons from tax enforcement.
The mainstream media, to no one’s surprise, did a miserable job of exposing this Republican dishonesty in the debt limit negotiations. But at one point in our recent past a courageous soul did emerge to expose the rot in our tax system. What happened? The ultra-rich and their henchmen in Congress make sure that this soul faced a punishment far more severe than any punishment ever meted out to those few rich Americans who actually get caught evading their taxes due.
That courageous soul, Charles Littlejohn, worked as an IRS contractor. He leaked tax return information related to Trump and America’s billionaires to The New York Times and ProPublica. ProPublica used that leaked information to write over 50 stories about billionaire tax avoidance, embarrassing and angering many of our richest in the process. Two of them even brought lawsuits, one against the IRS and the other against Littlejohn’s employer.
Ultimately, Littlejohn pled guilty to one count of unauthorized tax return information disclosure, a crime that carries a recommended sentence of four to 10 months. But 25 Republican members of Congress, undoubtedly at the behest of their billionaire patrons, wrote the judge in the case and urged the harshest possible sentence of five years. The judge obliged, stating in her sentencing remarks that Littlejohn posed a graver threat to democracy than the January 6 rioters. As tax law professor Reuven Avi-Yonah has noted, Littlejohn is now serving a sentence far harsher than any imposed on rich Americans convicted of tax evasion.
Littlejohn’s extreme sentence did not reflect the one single count of unauthorized tax return information disclosure he pled guilty to. That sentence reflects his “crime” of exposing the tax avoidance of the billionaire class.
Try this thought experiment: Imagine if Littlejohn had released the return information of 1,000 or so taxpayers with modest incomes to ProPublica. Imagine that ProPublica had then publicly detailed all the tip income that servers and bartenders among these taxpayers had failed to report and all the social meals that small business owners in the sample had claimed as business expenses. If Littlejohn had then pled to one count of unauthorized disclosure, would 25 members of Congress have intervened? Would the judge have imposed a sentence over six times the maximum recommended in federal sentencing guidelines?
Doesn’t it become dangerous to society when the punishment for a crime depends on who the victim happens to be?
We are now living that danger. Our billionaires sit firmly in control. And they will do whatever it takes to make sure they never pay tax at an appropriate level—even if that means locking a human being up for a preposterously long time just to send a message.
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Tax Prep Companies’ Business Model Exploits Low-Income Payers
The average parent in low-income communities is being bombarded with advertising designed to trick them into wasting their hard-earned money that could otherwise be going to groceries, gas, and other necessities.
Apr 16, 2024
How far could an extra nine hours and $150 go for you and your family? That’s how much Intuit’s TurboTax and H&R Block are taking from their average customer in low-income neighborhoods. Many of these customers don’t know that they can access these services for free—and that’s intentional. The average parent in low-income communities is being bombarded with advertising designed to trick them into wasting their hard-earned money that could otherwise be going to groceries, gas, and other necessities.
With Tax Day just passed, corporate tax prep giants are trying to extract every last dollar they can from Black communities and working-class taxpayers. A new report in partnership with Better IRS, titled Preying Preparers: How Storefront Tax Preparation Companies Target Low-Income Black and Brown Communities sounds the alarm on how exploiting low-income taxpayers is core to the business model of tax prep companies.
As it stands, 70% of taxpayers are eligible to file their taxes for free, but less than 3% have actually used the failed, corporate-backed free file service. The overwhelming majority of qualifying taxpayers are being coerced by unscrupulous corporate practices like deceptive advertising, overcharging, or hiding the free options.
Now that the IRS has made Direct File a free option, we call on the agency to expand the program.
Tax prep companies rely on and take advantage of economically disadvantaged communities. In fact, areas with the most people claiming the Earned Income Tax Credit have 75% more tax preparers for each person filing taxes compared to areas with fewer people claiming the credit. Furthermore, these major companies primarily hire what are called “unenrolled” tax preparers who lack expertise, certification, or credentials in tax rules and policy. Tax prep companies bank on their proximity, non-stop advertisement, celebrity endorsements, sweepstakes, and giveaways to legitimize their illegitimacy.
Unsurprisingly, companies like H&R Block have dismissed our report by noting the prolific number of locations, the years of experience of their preparers, and their 100% accuracy guarantee. They believe that because there are 9,000 locations across 50 states and most Americans live within five miles of one of their stores, then surely they must be helping hardworking families.
What this actually confirms is that H&R Block preys on low-income communities and communities of color by saturating the neighborhoods of targeted EITC-eligible taxpayers. Additionally, admitting unqualified preparers have been filing taxes for an average of 10 years or more is cause for concern. The predatory locations and disproportionate filing of EITC-eligible tax returns can both explain why Black taxpayers are audited at higher rates than their counterparts and why many people fail to take the deduction even though they are eligible. In this instance, correlation is causation.
These companies claim they are operating within the rules of the game—of which there are none. In 2010, the IRS tried to regulate the practice citing “an abysmal failure rate among unenrolled preparers” and pointing out that 1 in 4 of the 84,000 unenrolled preparers who took the competency exam failed, and more than 320,000 others never took it. That’s why we’re asking for accountability and for regulation of these tax preparers.
The introduction of the IRS Direct File pilot program represents a significant opportunity to dismantle economic inequality in our tax system. Direct File provides a much-needed alternative to costly tax preparation services in 12 states. This service is simple, free, readily available online, and a step in the right direction that empowers working-class people with an option to keep money in their pockets.
In the fight against corporate greed, we stand firm in our resolve. It’s time to hold these giants accountable, to empower the working class, and to build a fairer, more just system for all. Recent enforcement actions by the Federal Trade Commission are an important step; the public should know if they were overcharged and by how much.
With overwhelming public support for IRS modernization, including competency exams to ensure accountability and professionalism, the time for change is now. Now that the IRS has made Direct File a free option, we call on the agency to expand the program. The pursuit of an economy that works for everyone is ongoing. It starts with holding corporations accountable for their exploitative practices, advocating for policy solutions that prioritize the needs of working-class individuals, and ensuring equal access to resources and opportunities for all tax-payers.
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