Providing for Consideration of Senate Amendment to H.R. Build Back Better Act

Floor Speech

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Mr. SMITH of Nebraska. Mr. Speaker, I thank my colleague from Texas for yielding me time.

As Mr. Burgess pointed out, if we defeat the previous question, I will move to amend the rule to make in order my amendment to strike funding for IRS enforcement activities.

The administration's own Treasury Department has said this funding would be used to hire 87,000 new IRS agents. This has been verified. These agents will be focused on targeting American families, small businesses, farmers, and ranchers with audits.

Families and small businesses are struggling. That is no secret. Inflation is at 8.5 percent. Food and gas prices are at record highs. Despite this bill's name, reasonable economists agree it will do nearly nothing to actually reduce inflation, especially in the near term.

Small business pessimism about costs and access to workers is at all- time highs, and audits would only compound this misery. Estimates put the starting cost to a small business being audited in the range of $10,000 to $75,000. Ridiculous. That is the last thing our small businesses need, the vast majority of whom follow the law. They are law-abiding individuals and law-abiding businesses.

My amendment makes the following changes to the bill.

It strikes the $45 billion for enforcement activities, which include legal and litigation support, digital asset monitoring, and enforcing criminal statutes. Those are audit activities.

It strikes $25 billion for operation support, which includes rent payments, printing, postage, and other administrative activities to support the new auditors. It also strikes $104 million for the Office of Tax Policy at IRS, the office which creates new tax regulations.

It strikes $153 million for the U.S. Tax Court, where cases related to these new audits would be heard, and it strikes $50 million for Treasury to implement these changes.

Now, let me tell you what this amendment would not do. This amendment leaves in place $3.2 billion for taxpayer services to help address the backlog of nearly 20 million unprocessed returns. We agree this backlog is a serious problem, and taxpayers need better customer service. It leaves in place $4.8 billion for badly needed IRS systems modernization.

According to the CBO, the bill would still reduce the deficit if we adopt this amendment while leaving every other provision of the package intact.

Unless there are Senate Democrats who believe auditing families and small businesses is the single most important part of this bill, they should have no problem expeditiously passing it again.

Because we would only make in order this one single amendment, if we defeat the previous question, it will only delay final passage of the bill by about 20 minutes.

Mr. Speaker, I have many serious concerns about this bill that the rule makes in order, which I will discuss later. I find it particularly troubling the Democrats think auditing thousands of more American families and small businesses is the solution to inflation.

Let's defeat the previous question and help assure law-abiding Americans that the IRS isn't going to show up at their doors.

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Mr. SMITH of Nebraska. Mr. Speaker, it is interesting, in this exchange here, the claims being made that this bill will just do so many wonderful things for our country and that they are holding harmless folks making less than $400,000.

The CBO just reported that at least $20 billion in savings from this bill will come from families making less than $400,000 a year, hardly what has been stated by the folks advocating for this bill.

We know that the facts point out that it is 87,000 new employees, including agents, over at the IRS, and these full-time equivalents would take place by 2031. I am not sure where those folks come from, necessarily. I know it has been stated that this would fill vacancies or answer retirements for the next few years. But why do we need new money for that? That should already be budgeted.

Certainly, these agents at the IRS have law enforcement authority. They have badges that let them walk around the magnetometers at the airports. Certainly, I would assume they are armed, as well.

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Mr. SMITH of Nebraska. The Joint Committee on Taxation estimates 78 to 90 percent of new revenue from unreported income will come from folks earning less than $200,000 per year.

I think we need to be very cautious as we move forward and grow an agency that even President Clinton pushed back on when he was President, realizing that the agency was harassing the American people.

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Mr. SMITH of Nebraska. Mr. Speaker, let me be very clear that if Secretary Yellen were accurate when she said that inflation was transitory, we would have no reason to be here right now. Obviously, she has backed off those comments based on realities, and that is what we need to focus on. Now, the realities and the facts are not what some hopes might be for some legislation on the floor.

Mr. Speaker, I include in the Record documents from the CBO, the JCT, the GAO, and the Department of the Treasury.

CBO has received a number of questions regarding our estimate of an amendment offered by Senator Crapo during the floor debate on H.R. 5376 last weekend. That amendment, #5404, would limit the use of additional funds for the Internal Revenue Service. If the amendment had been adopted none of the additional funds could have been used to audit taxpayers with taxable incomes below $400,000.

CBO did not complete a formal cost estimate in advance of consideration of the amendment but the agency did provide the following information to the Senate Budget Committee:

CBO estimates that the amendment 5404 would have the following effects:

No effect on outlays in the one or ten year budget windows; would reduce outlays in the five year budget window.

No effect on revenues in the one year budget window; would reduce the ``non-scorable'' revenues resulting from the provisions of section 10301 in the five and ten year budget windows.

No effect on outlays after 2031 but would decrease the ``non-scorable'' revenue resulting from the provisions of section 10301 after 2031.

CBO has not completed a point estimate of this amendment but the preliminary assessment indicates that amendment 5404 would reduce the ``non-scorable'' revenues resulting from the provisions of section 10301 by at least $20 billion over the FY2022-FY2031 period. Thanks, Leigh Angres, Director of Legislative Affairs, Congressional Budget Office. ____ Congress of the United States, Joint Committee on Taxation, Washngton, DC, August 17, 2021. Memorandum To: Redacted. From: Thomas A. Barthold. Subject: Distributional Information.

This memorandum responds to your request for distributional information on a proposal in Treasury's ``General Explanations of the Administration's Fiscal Year 2022 Revenue Proposals'' (the ``Greenbook''). The proposal, ``Introduce Comprehensive Financial Account Reporting to Improve Tax Compliance,'' requires financial institutions to report inflows and outflows for every account with at least $600 of inflows or outflows in a year, for tax years beginning after December 31, 2022. Although these inflows and outflows do not directly correspond to any line items on tax returns, the proposal is estimated to reduce underreporting of income, particularly on income subject to little or no information reporting, such as individual business income, self- employment income, and small C corporation income. We estimate that the proposal would raise $206 billion over the 2022-31 budget window.

We are unable to provide distributional effects for this proposal because we do not impute unreported income to our individual tax model, in part because the distribution of unreported income is not well identified. Instead, we provide some distributional information on the tax gap attributable to the types of taxpayers that might be most affected by this proposal. In particular, underreporting of non farm proprietor income, i.e., Schedule C income, was estimated to contribute $68 billion to the annual $245 billion individual income tax underreporting tax gap for tax years 2011 to 2013.\1\ Underreporting of Schedule C income also contributes heavily to the $45 billion self-employment (SECA) tax underreporting tax gap for those same years.\2\

The table below presents a distribution of estimated tax assessments from representative random audits related to underreporting of Schedule C income. To estimate these tax assessments, income adjustments from these audits were multiplied by estimated average marginal tax rates.\3\ As the table shows, more than half of the assessed amounts are estimated to come from taxpayers with reported income between zero and $50,000.\4\ To the extent that taxpayers with sole proprietor income tend to have lower income than taxpayers with partnership or S corporation income, the distribution of the tax assessments related to underreporting of Schedule C income might not represent the distributional effects of the Green Book proposal. To provide a fuller picture, the table also presents a distribution of estimated tax assessments related to underreporting of Schedule E income.\5\ Many random audits of Schedule E income did not include entity- level audits. Entity-level audits were likely more common among smaller, single-owner businesses.\6\ Thus, the Schedule E distribution below is incomplete and could skew toward lower incomes relative to a hypothetical distribution resulting from random entity-level audits.

The distributions below are grouped by reported adjusted gross income and therefore skew toward lower-income taxpayers relative to distributions done by true income (reported income plus unreported income). However, when audit adjustments are added to reported income, affected taxpayers tend to remain in the reported income group or move up only one income group.\7\ PERCENTAGE OF ESTIMATED TAX ASSESSMENTS RELATING TO UNDERREPORTING OF . . . ------------------------------------------------------------------------ Reported Adjusted Gross Income . . . Schedule C . . . Schedule E (2010 dollars) income income ------------------------------------------------------------------------ Less than $0........................ 5% 6% $0 to $50,000....................... 52% 34% $50,000 to $100,000................. 21% 25% $100,000 to $200,000................ 12% 13% $200,000 to $500,000................ 6% 14% $500,000 and over................... 4% 9% Total........................... 100% 100% ------------------------------------------------------------------------ Note: Details may not add to totals due to rounding. endnotes

1. Table 5, Internal Revenue Service, Tax Gap Estimates for Tax Years 2011-2013 (Pub. 1415), September 2019.

2. Table 2, ibid.

3. The random audits were done by the IRS National Research Program for tax years 2006-2014. Income adjustments from these audits are presented in tables A3 and A5, Jason DeBacker, Bradley Heim, Anh Tran, and Alexander Yuskavage, ``Tax Non-compliance and Measures of Income Inequality,'' Tax Notes Federal, February 17, 2020, pp. 1103-1118. The estimated marginal tax rates are from the Joint Committee staff's individual tax model and combine income and SECA tax rates.

4. In 2010 dollars. The income ranges in the table are also in 2010 dollars.

5. Schedule E encompasses many types of income, including partnership and S corporation income, but table A5 in DeBacker et al. (2020) does not distinguish between them.

6. See p. 11, Gerald Auten and David Splinter, ``Comment: Tax Evasion at the Top of the Income Distribution: Theory and Evidence,'' August 5, 2021, available at http:// www.davidsplinter.com/AutenSplinter-TaxEvasion.pdf.

7. Table 2, DeBacker et al. (2020). Appendix I: Objectives, Scope, and Methodology

As discussed below, we analyzed data for the most recent years available to determine (1) audit rates by selected income categories and the reasons for differences across these categories, and (2) audit outcomes and resources used for auditing individual tax returns across the income categories and the likely reasons for any trends. Our scope of work focused on taxpayer income and did not include analyzing audits by other characteristics, such as type of audit, type of auditor, or audit location.

Income levels. The Internal Revenue Service's (IRS) 2020 Data Book Table 17 provides data on audit rates and results by various groupings of total positive income. However, for our analysis and to simplify reporting, we developed fewer, broader income categories by combining IRS's income groupings, as shown in table 2. We analyzed IRS data using our broader income categories and compared the results with IRS's groupings. When the finer-level analysis provided additional insight, we discuss those insights in the report. In general, we used our broad income categories throughout the report to discuss general audit trends.

Similar to IRS, our income categories include returns with the Earned Income Tax Credit (EITC). We also analyzed EITC returns as a separate category because of their high volume and improper payment reporting. a. restoring irs resources

The first step in the President's efforts to restore IRS enforcement capability is a sustained, multi-year commitment to rebuilding the IRS. This involves spending nearly $80 billion on IRS priorities over the course of the decade including hiring new specialized enforcement staff, modernizing antiquated information technology, and investing in meaningful taxpayer service--including the implementation of the newly expanded credits aimed at providing support to American families. Importantly, the additional resources will go toward enforcement against those with the highest incomes, and audit rates will not rise relative to recent years for those earning less than $400,000 in actual income.

The President's proposal includes two components: a dedicated stream of mandatory funds ($72.5 billion over a decade) and a program integrity allocation ($6.7 billion over a decade). These mechanisms provide for a sustained, multi- year commitment to revitalizing the IRS that will give the agency the certainty it needs to rebuild.

The IRS proposal includes year-by-year estimates of the additional resources that will be directed toward the agency as well as the specific activities that these resources would support. The design ensures that the IRS is able to absorb and usefully deploy additional resources over the entire 10- year horizon and keeps budget growth manageable at around 10 percent per year. ____ Secretary of the Treasury, Department of the Treasury, Washington, DC, August 10, 2022. Charles P. Rettig, Commissioner, Internal Revenue Service, Washington, DC.

Dear Commissioner: The Inflation Reduction Act includes much-needed funding for the IRS to improve taxpayer service, modernize outdated technological infrastructure, and increase equity in the tax system by enforcing the tax laws against those high-earners, large corporations, and complex partnerships who today do not pay what they owe.

These crucial investments have been a focus of the Biden Administration since the President's first day in office, and I was heartened to see the legislation pass the Senate this weekend.

Notwithstanding the changes that arose because of Republican challenges during the Byrd process, I write today to confirm the commitment that has been a guiding precept of the planning that you and your team are undertaking: that audit rates will not rise relative to recent years for households making under $400,000 annually .

Specifically, I direct that any additional resources-- including any new personnel or auditors that are hired--shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels. This means that, contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited.

Instead, enforcement resources will focus on high-end noncompliance. There, sustained, multi-year funding is so critical to the agency's ability to make the investments needed to pursue a robust attack on the tax gap by targeting crucial challenges, like large corporations, high-net-worth individuals and complex pass-throughs, where today the IRS has resources to initiate just 7,500 audits annually out of more than 4 million returns received.

This is challenging work that requires a team of sophisticated revenue agents in place to spend thousands of hours poring over complicated returns, and it is also work that has huge revenue potential: indeed, an additional hour auditing someone making more than $5 million annually generates an estimated $4,500 of additional taxes collected. This is essential work that I know the IRS is eager to undertake.

For regular taxpayers, as you emphasized last week, the result of this resource infusion will be a lower likelihood of audit by an agency that has the data and technological infrastructure in place to target enforcement resources where they belong--on the high end of the income distribution, where the top 1 percent alone is estimated to not be paying $160 billion in owed taxes each year. That's important as a matter of revenue-raising, but it's also essential as a matter of fairness.

Crucially, these resources will support a much-needed upgrade of technology that is decades out-of-date, and an investment in taxpayer service so that the IRS is finally able to communicate with taxpayers in an efficient, timely manner. I look forward to working with you on creating new digital tools to allow taxpayers to get information from the IRS instantaneously and on improving taxpayer service, so the agency is well-equipped to answer calls when they come in.

This historic investment in our tax system will accomplish two critical objectives. It will raise substantial revenue to address the deficit; and it will create a fairer system, where those at the top who do not today comply with their tax obligations find it far less easy to do so, and where all taxpayers receive the service from the IRS that they deserve, and that your dedicated workforce is eager to deliver. The importance of the work ahead cannot be overstated. Sincerely, Janet L. Yellen.

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