P O L I C Y

A N A LY S I S
A pr i l 11, 2023 N u m b e r 942

Transforming the Internal

Revenue Service
B y J o s e p h B i s h o p -H e n c h m a n

EXECUTIVE SUMMARY

T
he 2022 Inflation Reduction Act (IRA) autho- businesses who are either blameless or who have made
rizes $80 billion in additional funding over 10 good-faith efforts to comply with the federal tax code,
years for the Internal Revenue Service (IRS), including middle- and lower-income Americans who are the
with the lion’s share going to increased enforce- least able to defend themselves.
ment. The Biden administration claims that the funding— Instead of giving more money for enforcement with little
enough to double the IRS workforce—will lead to the or no accountability, policymakers should transform IRS
collection of hundreds of billions of dollars of unpaid taxes. operations and management. Oversight agencies and think
Even if those higher revenues are realized, they would tanks have proposed technological and structural reforms
come at a high cost to the private sector. Although increased to improve IRS administration while reducing the econom-
enforcement is often characterized as combating tax cheats, ic losses that federal tax rules impose on individuals and
more-aggressive IRS enforcement would likely mean businesses and supporting civil liberties protections for
strong-armed actions against millions of individuals and taxpayers.

JOSEPH BISHOP-HENCHMAN is executive vice president at the National Taxpayers Union Foundation and an adjunct scholar at the Cato
Institute.
INTRODUCTION discrepancy generates an automated letter to the tax-
Nearly every American interacts directly or indirectly payer demanding that any resulting amount owed be paid
with the IRS. It annually collects almost $5 trillion in within 30 or 60 days or, alternatively, the taxpayer must
individual income, corporate income, and payroll taxes submit an explanation as to why they are innocent.3 The
by processing 261 million returns and forms. In 2021, IRS’s goal is to respond to such correspondence within
80 million taxpayers called or visited the IRS for assis- 45 days, but it has recently taken six months or longer.4
tance. The agency also administers complex “spending Failure to resolve the matter results in a fuller audit or a
through the tax code” programs, such as the Earned deficiency notice, which, depending on circumstances,
Income Tax Credit (EITC); the Child Tax Credit (CTC); and the taxpayer can appeal to the IRS Office of Appeals, the
the recent but now discontinued pandemic relief checks. independent Tax Court, or a federal judge. Over a million
In addition, the IRS has vast powers to levy interest and taxpayers receive such a letter each year and most agree
penalties, garnish wages, and seize a taxpayer’s assets to to pay. A key objective of the current IRS management is
satisfy tax obligations. to obtain more data from more sources to feed into this
The IRS often portrays itself as impoverished and out- relatively automated process.
gunned. When people ask the IRS why it answers only a
small share of phone queries, why it has months-long mail
backlogs, and why it aggressively chases taxpayers who
“The root causes of IRS dysfunction
make honest mistakes, the IRS blames a lack of money. are poor management, insufficient
However, the root causes of IRS dysfunction are poor man- oversight, and a mindset fixated
agement, insufficient oversight, and a mindset fixated on
on enforcement at the expense of
enforcement at the expense of service.
service.”
MISMANAGEMENT AND However, much taxpayer information is also received on
A N T I Q U AT E D S Y S T E M S paper and is processed manually. For the past two years, the
IRS has stored much of the paper in dozens of tractor-trailers
Buried in Paper that have regularly surrounded the IRS’s main processing
The National Taxpayer Advocate is an office of the IRS facility in Ogden, Utah. Unable to keep up with the pro-
tasked with looking out for the interests of taxpayers. cessing, the IRS has been buried under millions of pieces of
Recently, the current National Taxpayer Advocate, Erin unopened mail and unprocessed tax returns (see Figure 1).
Collins, told Congress, “Paper is the IRS’s kryptonite, As of December 2022, it still had nearly eight million unpro-
1
and the agency is still buried in it.” That is true because cessed and suspended individual returns.5
of the IRS’s antiquated approach to collecting taxes and In contrast to the automated system for digital infor-
administering spending through the tax code. The IRS mation, the IRS must still process 33 million paper tax
receives 4.7 billion pieces of information each year, primar- returns each year. While 91 percent of individual returns
ily through Forms 1042-S (foreign person’s income in the are filed digitally, only 69 percent of business returns are
United States); 1098 (mortgage interest); 1099 (miscel- filed digitally. One reason for the low rate of business digi-
laneous income); 5498 (retirement contributions); W-2 tal filing is that the IRS does not accept digital filing for
(wage income); W-2G (gambling winnings); and K-1 (pass- many of its forms. Form 1040-X, the amended tax return,
through income); as well as copies of forms provided to the is always processed on paper, even if a taxpayer submits
2
Social Security Administration. Most of this information is it digitally. The IRS processes paper submissions at a rate
provided in digital form. of between 200,000 and 250,000 returns per week, and
An automated system compares this information with since many filings are clustered around due dates, a back-
what has been self-reported by each taxpayer, and any log is inevitable.

2
Figure 1
Composition of the paper backlog, April 2022

100%
Business tax returns received in 2021: 684K
Correspondence on business returns: 1.0M
90% Amended business returns: 1.1M
Business returns awaiting manual review: 1.6M
80% Individual tax returns received in 2021: 1.6M

Other tax returns: 2.0M

70%
Other correspondence: 2.1M

60% Correspondence on individual returns: 2.2M

Amended individual returns: 2.6M

50%

40% Business tax returns received in 2022: 4.5M

30%

Individual tax returns received in 2022: 4.6M

20%

10%
Individual returns awaiting manual review: 5.3M

0%
Total: 29.3M

Sources: National Taxpayer Advocate, Internal Revenue Service.

Buried in Phone Calls professionals with IRS agents, telephoned the IRS ten
The backlog extends to the phone, leading the National thousand times as an experiment and determined that
Taxpayer Advocate to describe the 2021 IRS telephone ser- the average hold time was 70 minutes. Of these calls,
6
vice as “the worst it has ever been.” With the IRS tasked 28 percent received “courtesy disconnects,” which is the
with providing pandemic relief checks, phone calls to it IRS’s term for hanging up on someone who has been on
during the filing season grew from 39 million in 2019 to hold for 90 to 120 minutes and advising that the person
7
195 million in 2021. But taxpayers needing answers from should call another time because of extreme call volume.9
the IRS have had no choice but to wait: the IRS answered Consumer rankings of customer service place the IRS dead
the phone only about 11 percent of the time, and those last out of 221 private sector and government entities.10 As
lucky people got through after waiting an average of 29 the National Taxpayer Advocate commented, “If a private
8
minutes in 2022. Before the pandemic, in 2016–2017, company failed to answer nine out of ten customer calls,
enQ, a communication services firm that connects tax customers would go elsewhere.”11

3
Delays, Delays, and More Delays than $200 million a year in labor costs by ending the manual
The IRS takes over 350 days to resolve cases for the more processing of mass paper filing.17
than 300,000 taxpayers who cannot access their tax refunds Anecdotes suggest additional costs are imposed by the
because identity thieves have already filed a return using IRS’s labor-intensive and antiquated focus on paper-return
their information. For more ordinary correspondence and processing. In March 2021, the IRS destroyed 30 million paper-
12
disputes, the IRS takes an average of 251 days to respond. filed information returns, such as Form 1099, because delayed
For these problems, the IRS has blamed a lack of funding, processing took it past the calendar year and the IRS computer
COVID-19 restrictions that limited in-person operations, and system could no longer enter the information.18 The Treasury
the current hiring crunch affecting the broader economy. But inspector general reported that the IRS lost out on $56 million
long after in-person work resumed and the private sector and in bank interest in 2021 by cashing checks long after they were
other government agencies began catching up, the agency received because of an inability to open mail quickly—or even
still has a months-long backlog of unprocessed tax returns just opening the mail containing checks quickly. The inspector
and unopened mail. The IRS’s problems with answering the general reported that equipment enabling that function would
phone, responding to taxpayer inquiries in a timely manner, cost less than a million dollars.19 The IRS operations at its
and adopting modern technology predate the pandemic. Kansas City facility ground to a halt because a vendor stopped
servicing printers and copiers, and employees went for months
having to do their jobs with little of the needed equipment
“The Treasury Department’s until the inspector general intervened.20
inspector general estimates that While most of the private sector and many government
the IRS could save more than agencies have embraced modern tools, such as email, text
$200 million a year in labor costs chat, digital attachment uploads, and online accounts where
customers can view documents, access services, and seek
by ending the manual processing customer support, the IRS has done little more than run
of mass paper filing.” periodic pilot programs.21 When the IRS does launch online
tools, they are not very useful. For example, the IRS’s “Where’s
COVID-19 would be a useful excuse, but the IRS’s woes are My Refund?” webpage has received hundreds of millions of
caused more by its ineffective use of past funds that were inquiries, but it does not tell taxpayers where their return
intended to modernize its operations. The IRS continues is in the process, why it is delayed, if it is delayed, or what a
to demonstrate resistance to modern technology and an taxpayer should do, leading the National Taxpayer Advocate to
unwillingness to accept that most taxpayer errors are not quip that the “IRS’s ‘Where’s My Refund?’ tool often could not
deliberate but are instead honest mistakes from good-faith answer that question.”22 Some paid tax preparers have access
efforts to follow confusing rules. to an online portal, but correspondence between them and the
IRS personnel manually enter paper returns into the IRS is not available on the portal because that is maintained on
IRS system, resulting in a keypunch error rate between a separate system, and joint filers cannot see certain items such
13
22 percent and 43 percent. In 2019, the Office of as the Child Tax Credit unless both spouses have accounts. The
Management and Budget (OMB) directed that all federal National Taxpayer Advocate observed that “tens of millions of
agencies create, retain, and manage all future records in taxpayers were forced to wait extraordinarily long periods of
14
electronic format. In March 2022, the National Taxpayer time for the IRS to process their tax returns, issue their refunds,
Advocate ordered the implementation of 2-D barcoding or and address their correspondence.”23
other scanning technology to make paper returns machine-
readable.15 The IRS has ignored both directives and has
yet to set a goal to implement barcoding or optical scan J U D G E , J U R Y, A N D E X E C U T I O N E R
technology on a broad basis.16 The Treasury Department’s Many federal agencies are mismanaged and inefficient,
inspector general estimates that the IRS could save more but IRS mismanagement is a more serious problem because

4
it has uniquely broad powers to seize money, impose penal- In tax matters, unlike other criminal law, the burden of proof
ties, disrupt lives, and close down businesses. “The power is generally on the individual, not the government. An “axiom-
to tax involves the power to destroy,” as Chief Justice John atic and elementary . . . foundation of the administration of our
Marshall once observed, and vast powers to tax are accom- criminal law” is that a person accused of a crime is presumed
24
panied by the vast potential to destroy. innocent until proven guilty beyond a reasonable doubt.29
The scope and use of these powers might be excusable if the While criminal defendants have the right to challenge witness-
IRS were managed with efficiency, honesty, and integrity. But es and evidence against them, they may also present nothing
the IRS is not well-run, as shown by the delays, the frequent and obtain dismissal of the case if the prosecution fails to meet
errors in calculating tax amounts, the leaks and thefts of pri- its burden.30 In tax law, however, the burden of proof rests with
vate tax return information, and other failures. The solution “the taxpayer to prove by a preponderance of the evidence that
is not additional funding without constraints but ensuring the Commissioner’s determination was erroneous.”31 After the
that the IRS’s extraordinary powers come with extraordinary federal income tax’s creation, Congress established a Board
checks and balances that protect individual rights. of Tax Appeals (predecessor to today’s Tax Court), which
adopted a rule placing the burden of proof on the taxpayer.32 In
1998, Congress attempted to shift the burden of proof back to
The IRS’s Extraordinary Powers the tax authorities but included so many exceptions to the rule
The IRS has vast powers to grab personal records, under- that it has proven to be ineffective.33
mining normal Fourth Amendment protections such as a
requirement to show probable cause before searches and
seizures. The Fourth Amendment to the U.S. Constitution
“Federal tax law allows the IRS
states, “The right of the people to be secure in their persons, to summon witnesses or obtain
houses, papers, and effects, against unreasonable searches records from any person without
and seizures, shall not be violated, and no Warrants shall
showing probable cause or
issue, but upon probable cause, supported by Oath or affir-
mation, and particularly describing the place to be searched,
obtaining a court order.”
and the persons or things to be seized.” Generally, federal
and state officials, before conducting a search or making an There is no trial by jury in Tax Court. While the Sixth and
arrest, must have probable cause, meaning “facts and cir- Seventh Amendments guarantee jury trials for criminal
cumstances within their knowledge and of which they had matters, this right is effectively eliminated for tax matters.
reasonably trustworthy information . . . sufficient to warrant Taxpayers challenging an IRS assessment can pay the dis-
a prudent man in believing that the [suspect] had commit- puted amount in full (tax due, interest, and penalties) and sue
25
ted or was committing an offense.” for a refund in a U.S. District Court or the U.S. Court of Federal
Historically, officials who search or seize property outside Claims, which is an expensive route to retrieve their disputed
of those bounds are considered trespassers, and the evidence money. The main way to challenge an IRS assessment before
26
obtained is inadmissible in court. However, federal tax law payment is to file a petition in Tax Court, but because Tax
allows the IRS to summon witnesses or obtain records from Court is an administrative tribunal (in legal parlance, an
any person without showing probable cause or obtaining “Article I court”) rather than an “Article III court” that exer-
a court order, and the U.S. Supreme Court held in 1964 that cises judicial power, it is not required to use jury trials.34
the IRS “need not meet any standard of probable cause to The Fifth Amendment also does not apply to tax mat-
27
obtain enforcement of [IRS] summons.” Challenging an IRS ters. The IRS Form 1040 requires taxpayers to sign “[u]nder
action on Fourth Amendment grounds is therefore very dif- penalty of perjury, I declare that I have examined this return
ficult, with courts only concerned that the IRS shows “good and accompanying schedules and statements, and to the
faith compliance with summons requirements” as “demon- best of my knowledge and belief, they are true, correct, and
28
strated by the affidavit of the IRS agent.” complete.” This requirement “operates to invalidate the Fifth

5
Amendment protection against self-incrimination . . . disclos- accepting comments and simply adopted the final rule.41 If the
ing information sought in tax returns constitutes a waiver IRS analyzes the compliance or economic costs of its subregu-
of Fifth Amendment protections [and the] IRS can and does latory guidance, it does not release its analysis publicly.42
release that information to federal, state, and local agencies
for both tax and nontax law enforcement purposes.”35 In 1927 “In more than 36 percent of cases,
the U.S. Supreme Court upheld the requirement to fill out and
file tax returns against a Fifth Amendment challenge, with
the Treasury Department made
Justice Oliver Wendell Holmes pithily stating that a taxpayer the proposed rule legally binding
“could not on that account refuse to make any return at all” before accepting any comments,
or “draw a conjurer’s circle around the whole matter by his and in nearly 5 percent of cases, it
own declaration that to write any word upon the government
blank would bring him into danger of the law.”36 Failing to file
skipped accepting comments and
a tax return is penalized at the rate of 5 percent of the unpaid simply adopted the final rule.”
tax per month, up to 25 percent of the unpaid tax, in addition
to tax owed, interest, and other penalties.37 Treasury and IRS guidance take many forms:

y Treasury Regulations/Treasury Decisions (TDs), (17 of

IRS Rulemaking Is Vast and Opaque these were issued in 2021)
The IRS does not follow normal due process, as other y Revenue Rulings (IRS official interpretation applying
government agencies usually must. Most agencies wishing to the law to a set of facts; 24 were issued in 2021)
adopt a regulation must first publish a proposed rule in the y Revenue Procedures (statements of internal practice
Federal Register, accept comments from interested parties and and procedure; 54 were issued in 2021)
the general public, and then issue a legally binding final rule y Private Letter Rulings (PLRs), (an official ruling
that responds to those comments. This “notice and com- obtained from the IRS giving its position on a set of
ment” or “notice of proposed rulemaking” (NPRM) procedure facts; 786 were issued in 2021)
is established by the Administrative Procedure Act (APA) of y Technical Advice Memorandums (TAMs), (explana-
1946 as part of a congressional judgment that “fairness and tions requested by IRS personnel; 3 were issued in 2021)
informed administrative decisionmaking require that agency y IRS Notices (public pronouncements that may contain
decisions be made only after affording interested persons substantive guidance; 66 were issued in 2021)
38
notice and an opportunity to comment.” An agency that y IRS Announcements (19 were issued in 2021)
does not follow this APA procedure risks a court striking down y various other documents, such as field service advice
the regulation as “arbitrary and capricious, an abuse of discre- memoranda, general counsel memoranda, Chief
39
tion, or otherwise not in accordance with the law.” Counsel notices, information letters, service center
The IRS and the Treasury Department do not follow APA pro- advice, and litigation guidance memoranda.
cedures for most of the hundreds of official changes they make
annually to how they enforce the tax code, “having claimed The bland names of these documents often understate their
for several decades that their rules and regulations are exempt importance. For instance, Revenue Procedure 2019-48 sets
40
from those requirements.” They characterize APA direc- the annual business travel per diem amounts; Revenue
tives as merely interpretive, not legally binding, and therefore Ruling 2019-13 establishes taxability rules for distributions
they are not subject to the APA. But even when the Treasury by dissolving S corporations; TAM 2019-03017 answers
Department has initiated a formal notice-and-comment rule- whether the value of meals and snacks provided by employ-
making process, it often skips steps. In more than 36 percent of ers to employees is taxable; and Notice 22-03 sets the
cases, it made the proposed rule legally binding before accept- standard mileage deduction rate. None went through APA
ing any comments, and in nearly 5 percent of cases, it skipped notice-and-comment procedures.

6
 Much of this guidance is included in the Internal Revenue position that taxpayers waive all their claims if they are one
Bulletin (IRB). Although the IRS claims that subregulatory day late in filing their appeal to the Tax Court. In that case, the
“guidance” is interpretive, most observers treat IRBs as IRS’s attempt to keep taxpayers from reaching the Tax Court
legally binding quasi-legislative activity that most practi- was self-serving and especially dangerous, as the Tax Court is
tioners ignore at their peril. For example, the Government the only neutral body that a taxpayer can reach for a decision
Accountability Office (GAO) noted in 2016 that the IRS itself before having to pay a disputed tax. Otherwise, a taxpayer
tells its employees that IRB materials are “authoritative” and must persuade the IRS’s Office of Appeals—which is not
“a good source of general information,” leading the GAO to functionally independent from enforcement functions and is
conclude that “taxpayers can use IRB guidance to support a often pressured by leadership in specific cases—or undertake
position knowing that IRS is bound by IRB guidance because expensive, time-consuming litigation in federal court.
43
IRS employees must follow it.” It is no accident that the IRS set up a situation where it
claimed its one-sided and burdensome regulation was both
“The IRS attempted to dismiss the exempt from the APA process and unable to be challenged
because of the Anti-Injunction Act, or that the IRS can take
lawsuit by arguing that the federal months to respond to taxpayers, but taxpayers automati-
Anti-Injunction Act, a Civil War– cally lose if they take even one extra day to respond. The CIC
era law protecting the federal Services and Boechler decisions chip away at defenses that the
government from judges suddenly IRS has often used to insulate its subregulatory “guidance”
from legal challenge. But there still has not been a congres-
halting tax collection, precludes sional or judicial declaration that the IRS must follow the
any lawsuit against the IRS that APA. Until that happens, the IRS enjoys, as six federal judges
might halt tax collection.” observed in 2011, “a world in which no challenge to its actions
is ever outside the closed loop of its taxing authority.”46
The IRS’s refusal to follow the APA was a key issue in its
recent unanimous loss in the U.S. Supreme Court in CIC
Services, LLC v. IRS.44 In that case, the IRS had issued a Notice T H E B I D E N A D M I N I S T R AT I O N ’ S
punishing all tax advisers who file returns involving certain $80 BILLION “SOLUTION”
insurance transactions by ordering them to comply with In April 2021, the Biden administration announced its
extensive and expensive reporting and recordkeeping require- plan for fixing the IRS’s woes: a lot more money. The White
ments. One company sued the IRS over the requirements, House proposed giving the IRS an extra $80 billion over 10
arguing that the IRS issued the Notice without comply- years to add 87,000 more personnel—a significant boost
ing with APA notice-and-comment procedures. The IRS considering that its budget is about $13 billion per year and
attempted to dismiss the lawsuit by arguing that the federal currently employs 78,000 personnel.47 Congress adopted
Anti-Injunction Act, a Civil War–era law protecting the federal the $80 billion proposal as part of the Inflation Reduction
government from judges suddenly halting tax collection, Act (IRA) of August 2022. In early 2023, House Republicans
precludes any lawsuit against the IRS that might halt tax voted to rescind most of the funding, which will set up an
collection (except for a suit for refund after the taxpayer has ongoing battle over the IRS budget.
paid). The Supreme Court rejected this broad IRS reading of
the Anti-Injunction Act in a 9–0 decision, noting that it is “too
attenuated a chain of connection” to conclude that challeng- New Enforcement Efforts
ing the IRS’s notice would imperil tax collection. Threaten All Taxpayers
In 2022, the Supreme Court removed a separate IRS obstacle The extra $80 billion included $46 billion for enforce-
halting taxpayer lawsuits in another 9–0 decision in the ment, $25 billion in operations support, $5 billion for
45
case of Boechler v. Commissioner. This case rejected the IRS systems modernization, and just $3 billion for taxpayer

7
services. Administration officials claimed that the IRS account balance is $3,400 at any one time.53 Banks and
expansion would generate a windfall of $700 billion in extra credit unions immediately opposed the proposal because
48
tax revenue. But that figure was later revised down by the of implementation burdens; privacy advocates opposed
49
Congressional Budget Office (CBO) to just $207 billion. it because of data security issues; and taxpayer advocates
The money to be gained by squeezing taxpayers became a opposed it because they predicted that the IRS would gain a
significant “pay-for” in the IRA to supposedly reduce the mountain of data having little bearing on what people put
overall cost. on their tax returns. A group of state treasurers sent a letter
After a delay, in April 2023 the IRS produced a strategic to Washington leaders saying, “There is zero quantitative or
plan on how it would spend the $80 billion. While generally qualitative evidence that this proposed measure will aid in
discussing improving taxpayer service, IRS Commissioner collecting taxes from tax evaders.”54
Daniel Werfel said the focus would be “exclusively on After this outcry, the Treasury grudgingly raised its pro-
increasing our capacity to assess compliance of high-income posed threshold from $600 to $10,000.55 It reported that the
and high-wealth individuals, complex partnerships, and raised threshold would almost halve projected revenue col-
large corporations” by using enforcement activities such as lection from $470 billion to $260 billion over 10 years. This
expanded audits and new information reporting require- admission by the Treasury undermined the credibility of
ments that Werfel’s predecessor described as “intrusive to its original claim about targeting high-income individuals,
50
taxpayers.” These initiatives include capturing enormous since nearly half the revenue apparently came from those
amounts of data to be fed into IRS computers to look for with between $600 and $10,000 in annual bank account
perceived inconsistencies, and then sending out a flurry of activity.56 Senators then announced that they would not
automated letters to taxpayers demanding they explain the include the proposal in any pending legislation.
perceived inconsistencies or else pay more taxes to make a Other recent actions by the IRS indicate the type of
threatened audit go away. enforcement actions it is considering. Taxpayers who sell
or resell a few goods online each year will receive a 1099-K
form for the first time in 2024, likely misleading many of
“These initiatives include capturing them into thinking that they owe additional income tax.
enormous amounts of data to be Reselling something at a loss is not taxable income, but if
fed into IRS computers to look for the information is provided to the IRS, the taxpayer bears
perceived inconsistencies, and then the burden of proving that they did not make money on
the sale. Online platforms such as eBay, Etsy, and even
sending out a flurry of automated Ticketmaster will now generate Form 1099-K information
letters to taxpayers.” returns for anyone who resells something online for just
$600 in annual revenue. This is a change from the previ-
The few specific elements of this IRS vision that are ous level of 200 transactions and more than $20,000 in
public have prompted backlashes. In 2021, the Treasury revenue after the inclusion of a Treasury proposal in the
Department proposed that Congress amend the federal tax American Rescue Plan Act of 2021. The proposal is expected
code to require financial institutions to report annual inflow to raise just $7.7 billion over a decade, at a cost many times
and outflow transaction data to the IRS for all personal and that in compliance burdens on small internet sellers or
51
business accounts with at least $600 in annual activity. even individuals who sell a concert or sporting event ticket
The Treasury claimed that the proposal was “about mak- or two.57 The vast majority of these taxpayers have no tax
ing sure the top 1 percent can’t evade $160 billion per year liability from the sales but will have to explain that to the
in taxes,” but the low threshold level was guaranteed to IRS when they get a letter in 2023 claiming that they do.
ensnare virtually every business and individual in the coun- Taxation of cryptocurrency transactions will change after
52
try. The median American small business has an inflow Congress included several provisions in the Infrastructure
and outflow of $755 a day, and the median personal checking Investment and Jobs Act that passed in November 2021.

8
The bill requires that all digital asset transactions worth It is true that the IRS has archaic equipment, but it is not
more than $10,000 be reported to the IRS, which is prob- clear that funding is the problem. Since 1992, IRS funding
lematic in a deliberately decentralized financial system, levels have ranged between about $12 billion and $15 billion in
but also imposes this reporting requirement on noncus- constant 2021 dollars (see Figure 2).64 The IRS’s 2021 funding
todial actors such as vendors, blockchain validators, and level of $13.7 billion is about the same as the 30-year aver-
protocol developers. Several members of Congress have age funding level of $13.5 billion in constant dollars. The IRS
58
proposed amendments to roll back these changes. should be doing more with fewer people as better technology
An early version of what became the IRA law included a becomes available, as the private sector does continuously.
repeal of the requirement that IRS supervisors approve the
imposition of all taxpayer penalties. The approval require-
ment was added in 1998 after instances of IRS agents going
“Secretary of the Treasury Janet
rogue and imposing unsubstantiated penalties on taxpay- Yellen directed the IRS to submit
ers.59 Requiring supervisor approval seems like a minor a detailed plan for spending the
hurdle, but the IRS routinely neglects this step and sees
$80 billion by February 2023, but
penalties thrown out in litigation. The Joint Committee
on Taxation estimated that this change would have raised
it missed the deadline.”
$1.4 billion over 10 years in extra penalty collections, show-
ing that IRS agents’ failure to get supervisory approval is While the IRS headcount has declined the past 25 years,
hardly a small problem. After an outcry, Congress dropped efficiency gains in technology and communications have
the proposal from the final version of the IRA. enabled the private sector to produce more output with
Secretary of the Treasury Janet Yellen directed the IRS fewer people. Labor productivity, which is output per hour
to submit a detailed plan for spending the $80 billion of employed persons, grew 74 percent from 1992 to 2022.65
by February 2023, but it missed the deadline.60 The plan Thus, the private sector has found ways to improve worker
will be subject to close scrutiny, especially since the productivity about 1.9 percent per year, on average, over
Republicans took control of the House of Representatives the past three decades. Professional service firms—perhaps
in the 2022 midterm elections. A former IRS commissioner, the closest private-sector analog to compare IRS employee
John Koskinen, reacted to the $80 billion idea: “I’m not productivity—have seen large productivity gains.
sure you’d be able to efficiently use that much money.” Federal agencies, including the IRS, should be similarly
increasing their productivity. But the IRS has been reluctant
to deploy technology for better and more personalized ser-
The IRS Should Be Increasing vice and has stuck with labor-intensive and duplicative tax
Productivity processing practices, which are the causes of its continued
The IRS and its defenders blame a lack of funding for the inefficiency relative to the private sector.
agency’s lack of productivity. On Tax Day 2022, a Treasury
Department statement acknowledged the enormous
processing backlog and stated that it “is the byproduct of The Tax Gap Is Modest and Not Growing
chronic underfunding that has starved the IRS of the tools Supporters of increased IRS enforcement spending point
61
it needs to serve the American people.” The IRS took the to the federal tax gap of taxes that are legally owed but
Washington Post on a tour of its Austin office, showing off a not paid. But all tax systems have such gaps, and the U.S.
1970s machine to open mail, computers running Windows federal income tax gap is modest and not growing. Tax
XP, and “Tingle tables” used to manually sort incoming cheating is a problem, but there is not a growing crisis as
62
mail. ProPublica has released reports claiming that “the many pundits claim.
IRS was gutted” and forced to be “understaffed, hamstrung The IRS released its latest estimates of the tax gap in
63
and operating with archaic equipment.” 2022.66 The IRS found that the annual gross tax gap for

9
Figure 2
IRS budget in constant 2021 U.S. dollars
$15.5B

$15.0B

$14.5B

$14.0B

$13.5B

$13.0B

$12.5B

$12.0B

$11.5B

$11.0B

$10.5B

$10.0B

81 2

12 2
61 2
71 2

91 2
02 2

22
40 2

70 2

90 2

21 2
01 2
11 2

31 2
41 2
51 2
29 1
39 1

20 2
30 2

50 2
60 2

80 2
49 1
59 1

89 1
69 1
79 1

99 2
00 2
10 2

0
0
0
0
0

0
0

0
0
0
0
0
0
0
0
0
91

0
9

0
0

0
9
9
9
9
9
9
0

Sources: Internal Revenue Service; Bureau of Labor Statistics.

2014–2016 was $496 billion. After late payments and of GDP.71 The latest IRS study puts the U.S. federal tax gap
enforcement actions, the net tax gap was $428 billion. That at 2.7 percent, but with an estimated state-local tax gap
figure represented 2.7 percent of GDP, the same as estimates added, the U.S. total tax gap would be about 4.2 percent of
for other recent years, and down from 3.3 percent in 2001 GDP (see Table 1).72
and 3.4 percent in 2006.67 The IRS estimates that the gap in Policymakers often point to the richest individuals as
2017–2019 dipped to 2.6 percent of GDP. the main tax gap problem, but that is not what the IRS
International studies show that the United States has a data show. Two of the largest drivers of the U.S. tax gap are
68
fairly low tax gap compared to other countries. In a 2018 pass-through businesses and self-employed freelance and
study, Polish economists Konrad Raczkowski and Bogdan “gig” economy workers. There would be a substantial cost
Mróz estimated tax gaps for 35 countries, including 28 EU in heavy-handed enforcement actions against such taxpay-
countries and the United States. They put the U.S. gap at ers. As Cato’s Chris Edwards writes: “If the IRS were to
69
3.8 percent of GDP and the EU gap at 7.7 percent of GDP. squeeze more money out of small businesses, for example,
In a 2015 study, Raczkowski estimated that the tax gap for some businesses would reduce hiring and investment
70
28 EU countries was 10.7 percent of GDP. In a 2019 study, or even close their doors. Those responses would reduce
political economist Richard Murphy estimated that the revenues raised. Tax cheating is unethical, but higher taxes
tax gap for 28 EU countries was equivalent to 5.6 percent would damage the private economy whether they stem

10
Table 1
Tax gap as a percentage of GDP
Study United States Europe
IRS (2022) + estimated state/local 4.2%
Raczkowski and Mróz (2018) 3.8% 7.7%
Raczkowzki (2015) 10.7%
Murphy (2019) 5.6%

Sources: Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2014–2016 (Washington: Internal Revenue Service, August 2022); Konrad
Raczkowski and Bogdan Mróz, “Tax Gap in the Global Economy,” Journal of Money Laundering Control 21, no. 4 December 2018): 545–54; Konrad Raczkowski,
“Measuring the Tax Gap in the European Economy,” Journal of Economics and Management 21, no. 3 (October 2015): 58–72; and Richard Murphy, “The
European Tax Gap: A Report for the Socialists and Democrats Group in the European Parliament,” January 23, 2019.

from law changes or IRS crackdowns.”73 Consequently, represent 92.7 percent of all audits. Audit rates are higher for
the best way to reduce the U.S. tax gap is not through those with incomes of one million dollars or more; 7,395 of
expansive new audits or harsher enforcement on small those 639,361 returns, or 1.2 percent, were audited in 2019.
businesses and gig economy workers but by reducing tax But although the IRS says it wants to audit more high-income
and regulatory burdens that create the shadow economy in individuals but cannot because of a lack of resources, it has
the first place. Greater tax burdens from enforcement may found the resources to continue to audit hundreds of thou-
even grow the size of the shadow economy. sands of low-income and middle-income individuals.
In the past, the IRS has acknowledged that small business- If the IRS’s auditing resources are as slim as claimed, why
es, especially cash-based businesses, are the source of much is it not exclusively focused on high-income individuals and
74
of the tax gap. Notwithstanding public IRS statements that businesses likely to generate the most revenue? Because, as
the $80 billion in added enforcement will focus on billion- IRS statistics bear out, targeting auditing resources toward
aires and millionaires, tax officials privately acknowledge low-income and middle-class individuals is more lucrative.
that any effective tax gap enforcement regime would neces- For example, in 2021, the IRS generated $3,130 per audit
75
sarily target the gig economy and cash-based businesses. hour on returns that claim the Earned Income Tax Credit
Policymakers should remember that the IRS is often wrong, (EITC), which is almost double the $1,590 per audit hour
and more enforcement means targeting more people who from returns of $1 million to $5 million, although less than
76
prove to be innocent. returns with incomes higher than $5 million.78 The Con-
gressional Research Service (CRS) estimated that the IRS
takes 1.6 hours to complete an audit of a low-income EITC
Auditing Those Who Won’t Fight Back recipient, while it takes 10.8 hours for an average non-EITC
Supporters of expanded IRS funding argue that the audit.79 If pressed to maximize its return on investment, the
agency’s audit rates have been dropping, particularly of IRS will increase audits of low-income people and cheaper
high-income individuals, and that added funding will correspondence audits instead of pursuing audits of higher-
reverse this trend. However, the IRS directs funding toward income people that take longer to complete.
auditing low-income and middle-income people because
that is where they can recover money. Of the 386,752 audits
the IRS conducted in 2019, 196,717 (50.8 percent) were on The IRS Can’t Do Your Taxes for You
tax returns with less than $25,000 in income, and a further The IRA designates $15 million for the IRS to study the
162,308 (41.9 percent) were on tax returns with income feasibility of developing a direct e-file tax return system to
77
between $25,000 and $200,000. The IRS will likely con- replace current free file options provided by private vendors.
tinue to audit low- and middle-income people. This government-run portal will have its challenges, with
In fairness, 93.8 percent of all tax returns have an income practitioners (including a former IRS commissioner) say-
under $200,000, so it is not statistically surprising that they ing that a system focused on the simplest types of returns

11
may be the only one practicable.80 Complex eligibility rules 2. Digitize Tax Filing and Processing
for refundable credits, family information not available in Grocery stores have used barcodes for 40 years, state tax
third-party documents, and business and self-employment agencies have used them on tax returns for 20 years, and
deductions are complicating factors in expanding e-file nearly every restaurant rolled out QR code menus dur-
beyond the simplest types of returns. ing the pandemic. However, thousands of IRS data-entry
Far less practicable would be to have the IRS directly pre- employees still take months to manually enter tax returns
pare tax returns for all Americans, as is occasionally proposed into a database with an error rate that would be unaccept-
81
in Congress. The tax code’s complexity comes from ambigu- able in any private enterprise.
ous provisions that are susceptible to multiple interpreta-
tions, eligibility and phase-out rules that create uncertainty, “Pre-prepared tax returns also would
and confusing definitions of income, all of which generate
millions of tax disputes a year.82 While countries with simpler
create a major conflict of interest
tax laws, like Estonia, can produce prepopulated tax returns, since having the IRS prepare tax
the American tax system would require significant simplifica- returns would make it harder (and
tion before this could be a realistic option. Pre-prepared tax more intimidating) for taxpayers to
returns also would create a major conflict of interest since
having the IRS prepare tax returns would make it harder (and
challenge IRS positions.”
more intimidating) for taxpayers to challenge IRS positions.
The IRS’s continuing backlog challenges and privacy failures The IRS commissioner, Treasury secretary, and lawmak-
also demonstrate that it is not capable of undertaking such an ers should set a 2023 filing season goal to have all IRS forms
effort without catastrophic negative consequences. available for digital filing. For those who still file by paper,
all tax returns should have barcodes when they are printed
or else be compatible with optical scan technology when
A NEW VISION FOR THE IRS they are processed. The IRS should utilize existing technol-
Instead of the current policy direction of providing the ogy, not wait for future technologies to be invented. The
IRS a blank check, removing the leash on it, and directing it IRS now has the financial resources to cover purchase costs
to collect as much revenue as possible, lawmakers should needed to digitize tax filing and processing, and this change
consider a 10-part plan for reforming the IRS. would likely save the agency more than $1 billion in labor
costs over the next decade.85
Additionally, temporary COVID-19 changes that allowed
1. Codify Taxpayer Rights taxpayers to make electronic submissions should be made
The National Taxpayer Advocate developed a list of 10 rights permanent. This should include a congressional moderniza-
for taxpayers: the right to be informed; the right to quality tion of the “mailbox rule,” which treats mailed payments
service; the right to pay no more than the correct amount of as being submitted on the postmark date, but electronic
tax; the right to challenge the IRS position and be heard; the payments as being submitted only when the payment clears
right to appeal an IRS decision in an independent forum; the (which can sometimes be two or three days later).
right to finality; the right to privacy; the right to confidential-
ity; the right to retain representation; and the right to a fair and
just tax system.83 Congress added those rights to federal law in 3. Adopt Communications
2015 with modified language that deleted any ability for tax- Triaging and Other Tools
payers to invoke the rights in disputes.84 Without this, the list When the IRS demands answers from taxpayers, the
of rights has become a mere suggestion for IRS employees that agency insists on communicating only by mail (that it does
they can safely ignore. Congress should recodify these rights not open) or phone (that it does not answer). Almost alone
and strengthen the language from aspirational to enforceable. among the private or public sector, the IRS resists using

12
electronic mail to communicate.86 With email still a “new A fully integrated online account would benefit both tax-
technology” that seemingly frightens the IRS, there is little payers and the IRS. With such an account, taxpayers would
hope for more innovative tools such as automated online have an easier time filing their taxes and resolving disputes
chat services, artificial intelligence (AI) help desks, or Siri- with the IRS because it could easily view their past returns
style services that anticipate needs before they arise. and other filed forms.

“When the IRS demands answers

5. Establish an IRS Board of Directors
from taxpayers, the agency insists The IRS commissioner formally reports to, and is
on communicating only by mail appointed by, the president via the Treasury secretary, but
(that it does not open) or phone this relationship has been at arm’s length since Richard
(that it does not answer). Almost Nixon and some of his predecessors notoriously used the
IRS against perceived enemies.88 The reforms to insulate
alone among the private or the president’s direct control of the IRS are laudable but
public sector, the IRS resists using have created a situation where the commissioner effective-
electronic mail to communicate.” ly reports to no one. Congress approves the IRS budget and
conducts periodic oversight hearings where the commis-
The IRS management can start small by using the tried- sioner testifies, but these do not substitute for the regular
and-true technique of communications triage. All inquiries and ongoing review and approval of the IRS’s short-term
to the IRS should not be treated alike, but rather sorted into activities and long-term goals.
common questions (which can be serviced by online FAQs A board of directors can solve this supervision gap, create
and virtual assistance); clarifications of confusing matters accountability, and focus on long-term objectives. Such
(email where IRS personnel can provide clarification ques- an entity could insist on setting a customer service vision,
tions pointing to the correct answer); and in-depth or urgent with the commissioner regularly reporting on timelines and
resolutions of individual matters (phone or in-office visits, metrics to achieve it. The board could provide a voice for the
where conversations or extended back-and-forth are needed agency’s taxpayer constituencies and balance the enforce-
to resolve issues). Treating all communications alike makes ment focus of the IRS’s current management.
taxpayers sort through Technical Advice Memorandums
and Notices, spend 30 minutes on hold on the phone only to
receive “a maelstrom of confusion” when they get through, 6. Revise the IRS Legal Strategy to
and wait by the mailbox for months for a letter in response. 87 Prioritize Clarity for Taxpayers
With support from existing technology, the IRS can be more The IRS should be reflecting on its current legal strategy
dynamic in its customer service and resolve easy questions after successive 9–0 losses in the U.S. Supreme Court in
so it can focus its human resources on harder ones. CIC Services and Boechler, as well as a string of losses in Tax
Court in cases where the IRS is using audit, litigation, and
listed transaction obligations to deter taxpayers from tak-
4. Implement Online Accounts ing deductions that the IRS disfavors. Letters from the IRS
Most financial institutions, online sellers, utilities, and to taxpayers and its subregulatory guidance are frequently
government agencies offer users a single centralized online written in confusing legalese. Often the IRS will not answer
account from which to view documents, access services, and direct questions about its position and then litigates when
seek customer support. The IRS has created online tools to taxpayers choose wrong— IRS whistleblowers say that is
perform specific functions, such as checking on the status deliberate policy.89 In both CIC Services and Boechler, the IRS
of a refund, but taxpayers still do not have access to a single invoked technicalities in court rather than seeking judicial
account with all their tax filing information. clarity of the questions on their merits.

13
 The primary goal of the IRS’s legal strategy should be clar- jurisdiction of the Tax Court, which uses neutral judges and
ity for taxpayers, with enforcement prioritized only where faster and easier procedures than federal court, should be
that clarity exists. The IRS commissioner and chief counsel expanded to take the place of the IRS’s biased appeals office.
should not initiate enforcement in any situation where the Currently, taxpayers who pay the disputed tax or do not
law or interpretive guidance is disputable. Where the agency respond to a math-error notice or a deficiency notice within
has failed to give clarity to taxpayers on what they should do a short timeframe lose their right to go to Tax Court. All filing
in a particular situation, taxpayers suffer when the IRS pro- deadlines for taxpayers should be waivable by the court under
vides that clarity only through after-the-fact enforcement common equitable doctrines.
actions rather than through statutory changes or regula-
tory announcements. The IRS should also agree to proceed
to merit determinations rather than use legal technicality 8. Increase the Independence of
arguments to avoid them. the National Taxpayer Advocate
In 1998, Congress established that the National Taxpayer
Advocate would be appointed by the Secretary of the
7. Enhance Taxpayer Appeal Rights Treasury, establishing that the advocate could be an effective
For decades, the legal industry has extensively used watchdog while embedded within the IRS. But IRS leaders
mechanisms such as mediation, arbitration, or neutral fact- have increasingly resented the existence of the advocate and
finding followed by negotiation for resolving disputes short sometimes resist or revoke the advocate’s orders and inter-
of litigation. These tools are cheaper and provide quicker fere with personnel decisions in the advocate’s office. The
resolutions. Unfortunately, the IRS resists these innovations current advocate has proposed a series of statutory changes
and prefers to go immediately from audit to litigation with to increase her independence, including reversing the IRS’s
no involvement from neutral third parties. The IRS com- policy of not allowing the advocate to hire lawyers or file
missioner should reverse this policy, and Congress can also amicus briefs; ending the IRS practice of conducting person-
modify statutes governing the IRS dispute process to incor- nel reviews of the advocate’s staff; granting the advocate
90
porate alternative dispute resolution. access to IRS memos and documents; allowing the advocate
to continue operations during government shutdowns (as the
IRS is allowed to do); and requiring the IRS to respond to the
“Congress could also consider advocate’s comments on proposed regulations or guidance.92
narrowing the Anti-Injunction The National Taxpayer Advocate is often the first to sound the
Act to limit only preliminary or alarm on problematic IRS practices, and these changes would

temporary injunctions instead of strengthen the advocate’s ability to do so.

the current broad ban on suing the

IRS in federal court. This change 9. Reform Penalty and
would allow more taxpayers to Interest Provisions
have their day in court without Taxpayers should not pay an economic cost for waiting
months for their tax refunds to be processed. They should
first paying the disputed tax.” be compensated for the delay. The IRS does pay interest on
delayed tax refunds, but the set rates lag market interest
Congress could also consider narrowing the Anti-Injunction rates. In 2022, the IRS raised the interest rate paid on refunds
Act to limit only preliminary or temporary injunctions instead from 3 percent to 6 percent, which still runs below the 7 to
91
of the current broad ban on suing the IRS in federal court. 9 percent inflation rate.93
This change would allow more taxpayers to have their day Self-employed individuals who make estimated tax pay-
in court without first paying the disputed tax. Similarly, the ments generally receive no interest if they overwithold,

14
leading to the oft-stated warning by financial advisers not investment for low‐​income communities, clean fuel
to make “an interest-free loan to the government” in the production, public university research infrastructure, and
form of excessive estimated tax payments. This leaves tax- compensation for local journalists.94
payers susceptible to penalties if they estimate incorrectly, Instead of complicating the tax code with an ever increas-
while also likely depriving the federal government of more ing number of tax breaks, lawmakers should reverse course
spread-out revenue. and push for a major simplification. They should aim for a
Requiring the IRS to pay realistic interest on all refunds bet- neutral tax, a flatter tax rate structure, and a reduction in
ter accounts for inflation and ensures that taxpayers do not penalties on saving and investment. A flat tax, for instance,
lose value on their refunds by being forced to wait. It would could reduce U.S. tax compliance costs by over 90 percent.95
also create a greater incentive for the IRS and Congress to Other countries have undertaken dramatic reforms to sim-
ensure on-time processing and payment. plify their tax codes and reduce tax rates, and so there is no
reason why the United States cannot make major reforms.96

10. Dramatically Simplify

Federal Tax Laws CONCLUSION
Tax complexity imposes a large cost on Americans by A powerful but dysfunctional IRS is very costly to taxpay-
distorting individual decisionmaking and discouraging ers and is not the best way to improve tax compliance.
business investment. Fair administration and easy com- Many policymakers say they want to close the tax gap but
pliance can reduce some of these costs, but policymakers overlook the important role that an efficient, disciplined,
should go further and pursue fundamental tax reform to and accountable tax collection agency could play in achiev-
dramatically reduce the burden of tax code compliance and ing that goal.
the adverse economic effects of taxation. Instead of funneling more enforcement money to an
The federal income tax does not merely collect revenue unaccountable entity, policymakers should transform the
to fund government services but is also used to microman- IRS. This study provides 10 reform suggestions, including
age the activities of individuals and businesses on a vast the creation of a board of directors to provide more active
scale. Tax complexity continues to grow because each oversight. Lawmakers and IRS leaders should also consider
administration and Congress proposes new targeted tax reform ideas offered by the Treasury Department’s Inspector
breaks to manipulate the economy, and many become General, the National Taxpayer Advocate, the Government
law. President Biden’s tax proposals in 2021 included a Accountability Office, and the National Taxpayers Union.
vast array of new and expanded tax breaks, including for The IRS should rethink its culture of enforcement-before-
low-income housing, new markets, electricity produced service and guilty-until-proven-innocent attitude, which
from renewable resources, solar facilities, alternative fuels, views all taxpayers as cheats who deserve maximum pres-
electric transmission property, carbon sequestration, sure for every perceived transgression. The IRS’s aggressive
nuclear power production, aviation fuel, clean hydrogen, culture has led to its view that its rulings need not go
nonbusiness energy property, residential energy effi- through the normal procedures followed by other agencies,
ciency property, energy‐efficient commercial buildings, and to a legal strategy that has resulted in consecutive 9–0
energy‐efficient homes, conservation, wildfire mitigation, rebukes by the U.S. Supreme Court.
plug‐in electric vehicles, commercial electric vehicles, fuel The most important reform steps need to be taken by
cell vehicles, alternative fuel refueling property, electric Congress. It should pursue major tax reforms to reduce the
bicycles, advanced energy projects, insulation installa- tax code’s vast compliance costs and reduce the need for a
tion, manufacturing investment, advanced manufactur- large IRS. Short of such reforms, policymakers should push
ing production, environmental justice, clean electricity for technology and structural changes to the IRS to cut costs
production, clean electricity investment, clean electricity for them and taxpayers alike.

15
NOTES

1. National Taxpayer Advocate, “Preface,” in Objectives Report Congress,” Internal Revenue Service, press release, June 22,
to Congress, Fiscal Year 2023 (Washington: Internal Revenue 2022.
Service, June 23, 2022).
13. Some 43 percent of paper returns had errors, with the
2. Internal Revenue Service, Data Book 2021 (Washington: IRS acknowledging transcription errors on 22 percent of the
Internal Revenue Service, May 2022). returns. See “A Service-Wide Strategy Is Needed to Address
Challenges Limiting Growth in Business Tax Return Electronic
3. Of these “math error” notices in 2021, more than five Filing,” U.S. Treasury, Inspector General for Tax Adminis-
million failed to notify taxpayers that they had 60 days to tration, May 4, 2022. And see National Taxpayer Advocate,
respond or else they forfeited their right to challenge the IRS Objectives Report to Congress, Fiscal Year 2023 (Washington:
position in Tax Court. See “NTA Blog: Math Error Part II,” Tax- National Taxpayer Advocate, June 23, 2022), p. viii.
payer Advocate Service, April 15, 2022.
14. “M-19-21: Transition to Electronic Records,” Office of Man-
4. National Taxpayer Advocate, Annual Report to Congress 2021 agement and Budget, June 28, 2019.
(Washington: National Taxpayer Advocate, 2021), p. 3.
15. Taxpayer Advocate Service, memorandum for Douglas
5. Joseph Boris, “IRS Indicates Steady Progress towards Clear- O’Donnell, “Taxpayer Advocate Directive 2022-1,” March 29,
ing Processing Backlog,” Thomson Reuters, August 31, 2022. 2022. The order noted that the IRS was first asked to adopt the
technology in 2002, at a time when 17 state tax agencies were
6. “National Taxpayer Advocate delivers 2022 Report to already utilizing it.
Congress,” Internal Revenue Service, press release, January 11,
2023. After this report was released, in early February 2023, 16. Douglas W. O’Donnell, Deputy Commissioner for Services
the Washington Post reported that the IRS is now answering and Enforcement, Internal Revenue Service, memorandum for
88 percent of phone calls, citing an anonymous Treasury Erin M. Collins, National Taxpayer Advocate, from “Taxpayer
Department source. Jacob Bogage, “This Just In: IRS Answer- Advocate Directive 2022-1,” July 18, 2022.
ing Nearly 90 Percent of Taxpayer Phone Calls,” Washington
Post, February 10, 2023. The Post later reported that this 17. “A Service-Wide Strategy Is Needed to Address Challenges
improvement is due to the IRS spending $426 million of Limiting Growth in Business Tax Return Electronic Filing,”
the $847 million spent so far in new IRA funds for taxpayer U.S. Treasury Inspector General for Tax Administration,
service. Jacob Bogage, “The IRS Braces for the Unthinkable: A May 4, 2022.
Normal Tax Season,” Washington Post, March 3, 2023.
18. Joe Bishop-Henchman, “Why Did the IRS Destroy
7. “Tax Filing: 2021 Performance Underscores Need for IRS to 30 Million Paper Records before Processing Them?,” National
Address Persistent Challenges,” Government Accountability Taxpayers Union, May 10, 2022.
Office, GAO-22-104938, April 2022.
19. “Plans to Close the Austin Tax Processing Center Should
8. “National Taxpayer Advocate Issues Midyear Report to Be Halted until Hiring Challenges and Substantial Backlogs at
Congress,” Internal Revenue Service, press release, June 22, Remaining Centers Are Addressed,” U.S. Treasury, Inspector
2022. General for Tax Administration, February 7, 2022.

9. Andrew Valiente, “We’ve Called the IRS over 10,000 Times. 20. “Interim Results of the 2021 Filing Season,” U.S. Treasury,
Here’s Everything We’ve Learned,” enQ Blog (blog), August 29, Inspector General for Tax Administration, May 6, 2021, p. 8.
2017.
21. “A Service-Wide Strategy Is Needed to Address Challenges
10. Katie Deighton, “Customer Experience Is Getting Worse,” Limiting Growth in Business Tax Return Electronic Filing,”
Wall Street Journal, June 7, 2022. U.S. Treasury, Inspector General for Tax Administration,
May 4, 2022, p. 8.
11. National Taxpayer Advocate, Objectives Report to Congress,
Fiscal Year 2023 (Washington: National Taxpayer Advocate, 22. National Taxpayer Advocate, Annual Report to Congress
June 23, 2022), p. viii. 2021 (Washington: National Taxpayer Advocate, 2021), p. 3.

12. “National Taxpayer Advocate Issues Midyear Report to 23. National Taxpayer Advocate, Annual Report to Congress

16
2021 (Washington: National Taxpayer Advocate, 2021), p. 33. 37. See 26 U.S.C. § 6651.

24. McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 431 (1819). 38. Kristin E. Hickman, “Coloring Outside the Lines: Exam-
ining Treasury’s (Lack of) Compliance with Administrative
25. Beck v. State of Ohio, 379 U.S. 89, 91 (1964). Procedure Act Rulemaking Requirements,” Notre Dame Law
Review 82, no. 5 (2013): 1727–808.
26. See, for example, Thomas Y. Davies, “Recovering the
Original Fourth Amendment,” Michigan Law Review 98, no. 3 39. 5 U.S.C. § 706(2)(A).
(1999): 547, 625; Mapp v. Ohio, 367 U.S. 643, 655 (1961).
40. CIC Services, LLC v. IRS, 925 F.3d 247, 258 (6th Cir. 2019).
27. 26 U.S.C. § 7602; U.S. v. Powell, 379 U.S. 48, 57 (1964).
41. Kristin E. Hickman, “Coloring Outside the Lines: Examin-
28. United States v. Norwood, 420 F.3d 888, 892 (8th Cir. 2005); ing Treasury’s (Lack of) Compliance with Administrative
see also Taliaferro v. Freeman, 595 F. App’x 961, 962–63 (11th Procedure Act Rulemaking Requirements,” Notre Dame Law
Cir. 2014) (holding Fourth Amendment challenge to IRS sei- Review 82, no. 5 (2013): 1727–808.
zure to be “simply without merit”).
42. Kristin E. Hickman and Bridget C. E. Dooling, “A Study
29. Coffin v. U.S., 156 U.S. 432, 453 (1895). See also Jackson v. to Evaluate OIRA Review of Treasury Regulations,” George
Virginia, 443 U.S. 307, 309 (1979) (“The Constitution prohibits Washington University Regulatory Studies Center, January 5,
the criminal conviction of any person except upon proof of 2022. And see Susan E. Dudley and Sally Katzen, “The Story
guilt beyond a reasonable doubt.”). behind the IRS’s Exemption from Oversight,” Wall Street
Journal, February 22, 2018.
30. See Fed. R. Crim. Proc. 29(a).
43. “Regulatory Guidance Processes: Treasury and OMB Need
31. Portillo v. Commissioner, 932 F.2d 1128, 1133 (5th Cir. 1991), to Reevaluate Longstanding Exemptions of Tax Regulations
citing U.S. v. Janis, 428 U.S. 433, 440 (1976). and Guidance,” Government Accountability Office, GAO-16-
720, September 14, 2016.
32. Adriana Wos-Mysliwiec, “The Internal Revenue Restruc-
turing and Reform Act of 1998: Does It Really Shift the Burden 44. CIC Services, LLC v. Internal Revenue Service, 593 U.S. 1
of Proof to the IRS?,” Journal of Civil Rights and Economic (2021).
Development 14, no. 2 (Fall 1999): 301–30.
45. Boechler v. Commissioner, 593 U.S. ___, 142 S. Ct. 1493 (2022).
33. 26 U.S.C. § 7491 (shifting burden of proof automatically
only where the IRS uses statistical reconstruction from unrelat- 46. Cohen v. United States, 650 F.3d 717, 726 (D.C. Cir. 2011) (en
ed taxpayers or for IRS penalties or additions to tax, and gener- banc).
ally only where the taxpayer has complied with substantiation
requirements and cooperated with IRS records requests); 47. Brendan McDermott, “IRS-Related Funding in the Infla-
Janene R. Finley and Allen Karnes, “An Empirical Study of the tion Reduction Act,” Congressional Research Service, IN11977,
Change in the Burden of Proof in the United States Tax Court,” October 20, 2022. And see Demian Brady, “What the IRS’s
Pittsburgh Tax Review 6, no. 1 (2008): 61–82 (“The results sug- New Enforcement Budget Means for Taxpayers,” National
gest that individual taxpayers were not helped by the change Taxpayers Union Foundation, September 21, 2022.
in the burden of proof in cases before the Tax Court.”); Chris
Edwards, “Top Ten Civil Liberties Abuses of the Income Tax,” 48. Richard Rubin, “Biden to Seek $80 Billion to Bolster IRS,
Cato Institute Tax and Budget Bulletin no. 4, April 2002 (“The Tax Enforcement,” Wall Street Journal, April 27, 2021.
new [burden of proof] rules do not apply to the 97 percent of
IRS actions that are deemed administrative in nature.”). 49. “Estimated Revenue Effects of Increased Funding for the
Internal Revenue Service in H.R. 5376, the Build Back Better
34. See 26 U.S.C. § 7441. Act,” Congressional Budget Office, November 18, 2021.

35. Chris Edwards, “Top Ten Civil Liberties Abuses of the In- 50. Internal Revenue Service, Internal Revenue Service
come Tax,” Cato Institute Tax and Budget Bulletin no. 4, April Inflation Reduction Act Strategic Operating Plan, FY2023–2031
2002. (Washington: Internal Revenue Service, April 2023); David
van den Berg, “IRS to Police the Wealthy with Funding Boost,
36. U.S. v. Sullivan, 274 U.S. 259, 263-64 (1927). Chief Says,” Law360, April 6, 2023; and Richard Rubin, “Biden

17
to Seek $80 Billion to Bolster IRS, Tax Enforcement,” Wall 63. Paul Kiel and Jesse Eisinger, “How the IRS Was Gutted,”
Street Journal, April 27, 2021. ProPublica, December 11, 2018.

51. “General Explanations of the Administration’s Fiscal Year 64. Internal Revenue Service, Data Book 2021 (Washington: In-
2022 Revenue Proposals,” U.S. Department of Treasury, May ternal Revenue Service, May 2022), Table 31. Data are adjusted
2021. by the consumer price index.

52. Kate Kelly and Alan Rappeport, “Biden’s Proposal to Em- 65. “Business Sector Labor Productivity (Output per Hour)
power I.R.S. Rattles Banks and Their Customers,” New York for All Employed Persons,” Federal Reserve Bank of St. Louis,
Times, October 11, 2021. FRED Economic Data.

53. Joe Bishop-Henchman, “How Many Americans Will 66. “Federal Tax Compliance Research: Tax Gap Estimates for
Be Subject to the New Tax Reporting on Bank Accounts?,” Tax Years 2014-2016,” Internal Revenue Service, August 2022.
National Taxpayers Union, September 30, 2021.
67. Chris Edwards, “IRS Report Shows Stable Tax Gap,” Cato
54. Dennis Milligan, letter to President Joe Biden and Treasury at Liberty (blog), Cato Institute, October 31, 2022. And see
Secretary Janet Yellen, State Financial Officers Foundation, Andrew Wilford, “IRS’s New Estimates on Tax Gap Track
September 20, 2021. Closely with NTUF’s,” National Taxpayers Union Foundation,
November 1, 2022.
55. Sarah Kolinovsky and Trish Turner, “Biden Admin Backs
Down on Tracking Bank Accounts with over $600 Annual 68. Chris Edwards, “U.S. Tax Gap Relatively Small,” Cato at
Transactions,” ABC News, October 19, 2021. Liberty (blog), Cato Institute, November 29, 2021.

56. Rep. Don Beyer (D-VA) said that a 2021 leak of taxpayer 69. Konrad Raczkowski and Bogdan Mróz, “Tax Gap in the
data from the IRS to advocacy group ProPublica was another Global Economy,” Journal of Money Laundering Control 21, no. 4
factor in undermining the proposal. See Richard Rubin and (December 2018): 545–54.
Orla McCaffrey, “Yellen, IRS Push Democrats to Require Banks
to Report Taxpayers’ Annual Account Flows,” Wall Street 70. Konrad Raczkowski, “Measuring the Tax Gap in the
Journal, September 15, 2021. European Economy,” Journal of Economics and Management 21,
no. 3 (October 2015): 58–72.
57. Demian Brady, “What the IRS’s New Enforcement
Budget Means for Taxpayers,” National Taxpayers Union, 71. Richard Murphy, “The European Tax Gap: A Report for the
September 21, 2022. Socialists and Democrats Group in the European Parliament,”
January 23, 2019.
58. Nikhilesh De, “US Congressmen Introduce Bill to Modify
Crypto Tax Provision in Infrastructure Law,” CoinDesk, 72. The state-local tax gap was estimated based on the ratio of
November 18, 2021. total state-local tax revenues to federal tax revenues of 0.56.

59. Joe Bishop-Henchman, “House Dem Bill Would Al- 73. Chris Edwards, “U.S. Tax Gap Relatively Small,” Cato at
low Retroactive IRS Penalties,” National Taxpayers Union, Liberty (blog), Cato Institute, November 29, 2021.
September 14, 2021.
74. J. Russell George, “A Closer Look at the Size and Sources
60. The six-month deadline was originally in the bill but was of the Tax Gap,” Testimony Before the U.S. Senate Committee
struck as being extraneous to the budget process under the on Finance, Subcommittee on Taxation and IRS Oversight,
Byrd Rule. See David Lawder, “Yellen Tells IRS to Produce $80 July 26, 2006.
Bln Spending Plan within Six Months,” Reuters, August 17,
2022. 75. See, for example, Memorandum from Mark Mazur, Acting
Assistant Secretary for Tax Policy, U.S. Department of the
61. Natasha Sarin, “The IRS Doesn’t Have What They Need to Treasury, September 14, 2021 (“[I]ncome sources with detailed
Serve Americans Well—Congress Can Help,” U.S. Department third-party reporting result in taxpayers reporting 90 percent
of the Treasury, April 18, 2022. or more of this income, while income sources without robust
third-party reporting generate reporting rates of 50 percent
62. Catherine Rampell, “Inside the ‘IRS Pipeline’ Used to Pro- or even lower.”); Natasha Sarin, Deputy Assistant Secretary
cess Tax Returns,” Washington Post, August 9, 2022. for Economic Policy, “The Case for a Robust Attack on the Tax

18
Gap,” U.S. Department of the Treasury, September 7, 2021 84. See 26 U.S.C. 7803(a)(3). See also Facebook, Inc. &
(“But the distribution of the underreporting tax gap is also Subsidiaries v. IRS (N.D. Cal. May 14, 2018) (holding that
the natural byproduct of the current information reporting the Taxpayer Bill of Rights “did not grant new enforceable
regime. There is a direct relationship between the informa- rights.”).
tion the IRS has at its disposal to verify that a taxpayer has
properly paid her tax liabilities, and her voluntary compliance 85. “A Service-Wide Strategy Is Needed to Address Challenges
rate. For ordinary wage and salary income, compliance with Limiting Growth in Business Tax Return Electronic Filing,”
income tax liabilities is nearly perfect (1 percent noncompli- U.S. Treasury, Inspector General for Tax Administration,
ance rate). In stark contrast, for opaque income sources that May 4, 2022.
accrue disproportionately to higher earners—like partner-
ship income, proprietorship income, and rental income— 86. The author has emailed the IRS, but the process is convo-
noncompliance can reach 55 percent.”); Andrew Wilford, luted. When an agent requests a document from a taxpayer,
Andrew Moylan, and Pete Sepp, “The Tax Gap: No Trillion they provide the taxpayer with a fax number to send it to.
Dollar Silver Bullet,” National Taxpayers Union Foundation The agents do not have fax machines but instead have a
Policy Paper, May 13, 2021 (“The IRS, for its part, blames program that converts incoming faxes into electronic attach-
pass-through income for a far larger share of the tax gap. Of ments that it delivers to the agent’s internal email. Indeed,
the $441 billion tax gap before late payments and enforce- the author does not have a fax machine either, and instead
ment efforts, the IRS attributes $110 billion to underreported sends the document by uploading it to a fee-based website
pass-through business income, and another $45 billion to that converts it to an outbound fax and delivers it. In short,
underreported self-employment tax liability. In order for we are emailing each other in an indirect way that takes 10–15
this to be true, closer to 60 percent of pass-through income minutes and incurs costs for the taxpayer.
would have to go unreported.”); and William Hoffman,
“Former Taxpayer Advocate Contests Rettig’s $1 Trillion Tax 87. “Tax Filing: 2021 Performance Underscores Need for IRS to
Gap,” Tax Notes, April 16, 2021 (“Equating the entire tax gap Address Persistent Challenges,” Government Accountability
[with] tax evasion is just so disingenuous,” Olson said. “And Office, GAO-22-104938, April 2022.
it’s also wrong. It’s incorrect.”).
88. Emily Langer, “Johnnie Walters, IRS Commissioner under
76. Chris Edwards, “IRS Tax Enforcement vs. Civil Liberties,” President Richard M. Nixon, Dies at 94,” Washington Post,
Cato at Liberty (blog), Cato Institute, November 11, 2021. June 26, 2014.

77. “Trends of IRS Audit Rates and Results for Individual 89. Andrew Velarde, “Ex-official Confirms IRS Ignores
Taxpayers by Income,” Government Accountability Office, Some Reasonable Cause Statements,” Tax Notes, February 7,
GAO-22-104960, May 2022, p. 24. 2022.

78. “Trends of IRS Audit Rates and Results for Individual 90. Taxpayer Advocate Service, Annual Report to Congress
Taxpayers by Income,” Government Accountability Office, (Washington: Internal Revenue Service, 2016), pp. 211–20.
GAO-22-104960, May 2022, p. 35.
91. Anti-Injunction Act, 26 U.S.C. § 7421.
79. Margot L. Crandall-Hollick, “Audits of EITC Returns: By
the Numbers,” Congressional Research Service, IN11952, 92. National Taxpayer Advocate, 2022 Purple Book
June 13, 2022. (Washington: Internal Revenue Service, December 31, 2022).

80. David van den Berg, “Free IRS E-file Plan May Need to 93. “Quarterly Interest Rates,” Internal Revenue Service,
Focus on Simple Returns,” Law 360, August 2, 2022. January 5, 2023.

81. Pete Sepp, “Another Congressional Bill, Another IRS ‘Free’ 94. Chris Edwards, “Simplify Tax Code to Solve IRS Mess,”
Tax File Scheme,” National Taxpayers Union, August 5, 2022. Cato at Liberty (blog), Cato Institute, April 15, 2021.

82. Internal Revenue Service, Data Book 2021 (Washington: 95. Arthur P. Hall, “Compliance Costs of Alternative Tax Sys-
Internal Revenue Service, May 2022), pp. 55, 60. For example, tems II,” Testimony before the U.S. House Ways and Means
the IRS assessed 40.9 million penalties and issued 12.3 million Committee, March 1996.
“math error” notices in 2021.
96. Chris Edwards and Daniel J. Mitchell, Global Tax Revolution
83. “Taxpayer Bill of Rights,” Internal Revenue Service. (Washington: Cato Institute, 2008).

19
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C I TAT I O N
Bishop-Henchman, Joseph. “Reforming the Internal Revenue Service,” Policy Analysis no. 942, Cato Institute,
Washington, DC, April 11, 2023.

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