Biden’s $80B proposal to fund the IRS is ‘dramatically in excess of what the IRS needs,’ says former IRS commissioner

Kautter’s now on the outside, looking in. He currently the federal specialty tax leader at RSM, an accounting and consulting firm and made the remarks at the firm’s tax summit.

His remarks on Biden’s vision for the IRS come during a Capitol Hill back-and-forth among Democrats on what’s in, what’s out and what size a spending bill should be that aims to strengthen the social safety net.

The “Build Back Better” proposal calls for roughly $80 billion to bolster the IRS, and that includes almost $45 billion for enforcement. The Biden administration says that money would enable the IRS to beef up its ranks and improve how it uses technology to ensure corporations and people making above $400,000 are paying their full tax bills.

Speaking Monday, Kautter noted he’s made this point before in opinion pieces arguing that while the IRS needs more money and more investment, but the agency can’t soak up that much cash.

Last week, Biden last week unveiled a stripped-down $1.75 trillion version of the “Build Back Better” proposal, which keeps offerings like universal preschool and temporarily expanded child tax credit payments while omitting initiatives such as paid family leave.

More taxes on the rich are still in Biden’s proposal, but it’s not rate hikes or taxes on unrealized capital gains, it’s surtaxes for households with at least $10 million incomes. Meanwhile, the fate of the current $10,000 cap on state and local taxes is still being debated.

So negotiations continue inside a party that cannot afford ‘no’ votes. Sen. Joe Manchin, a centrist Democrat from West Virginia, said Monday he’s not backing the bill until he knows how it would “impact our debt and our economy.”  

But if a well-heeled taxpayer thinks this will come to nothing, they better bet again.

“Between now and final passage, there will be a lot of noise and clutter in the system, and the bill will be dead 100 times and it will resurrect itself 101 times,” Kautter said.

“Nobody can see the future, but I predict there will be a tax bill this year,” said Kautter.

Whatever the specific menu of provisions and programs, passage could happen between the middle of this month and mid-to late December, Kautter said, speaking at a tax conference the firm was hosting.

Democrats have the prospect of another government shutdown and another debt limit coming next month, he noted. They also will want to go into 2022 “with some significant legislative accomplishments under their belt,” Kautter said.

Kautter served up more predictions for people marking their calendar: it will be approximately a year and a half before audits pick up, he said.

The IRS completed just over 500,000 audits last year, continuing an ongoing slide. The agency completed 1.5 million audits in 2010, IRS statistics show. The agency’s inflation-adjusted budget has declined 20% since 2010 and staffing has fallen by the same amount, according to a report from Erin Collins, the National Taxpayer Advocate within the IRS.  

But even with an infusion of funding, it would be about 18 months before audits pick up, Kautter said. That’s because the IRS needs to hire people, train them and determine how best to use the added staff.

Examinations of complex returns is tricky, sophisticated work, observers have said. There will be growing pains, Kautter said. “I’m not convinced that those audits, when they start, will be the most efficient audit that you will have ever been involved in.”

Kautter later told MarketWatch he had “no doubt that IRS agents conducting audits in the future will be well trained and knowledgeable. But, IRS audits are complicated projects and not all systems, especially those involving complicated projects, are easily scalable.”

Kautter added that “increasing audits by the significant amount indicated by the increased funding will create both systems and internal coordination challenges for the IRS.”