Fact-Checking Misleading Claims About the I.R.S.

WASHINGTON — Republican lawmakers continued their decades-long critique of the Internal Revenue Service in a Senate hearing on Wednesday, occasionally leveling inaccurate charges as they questioned President Biden’s nominee to lead the agency.

Here’s a fact check of some claims.

What Was Said

“The Joint Committee on Taxation says that 78 to 90 percent of that tax gap really is with taxpayers under $200,000, you know, lost reported revenue.”
— Senator Ron Johnson, Republican of Wisconsin

This is misleading. The tax gap — the difference between what is owed and what is collected — is largely because of evasion by the wealthy, not middle- and low-income taxpayers, existing research suggests.

In a 2021 report, the Joint Committee on Taxation estimated that the tax gap was about $441 billion annually from 2011 to 2013, with about 70 percent attributable from individual income. But the report did not break down the tax gap by income level. Rather, it said that distributional analyses can be “highly uncertain” because audits often fail to detect offshore evasion and underreporting of pass-through business income.

A spokesman for Mr. Johnson said he was referring to a 2021 response from the joint committee about a specific Treasury Department proposal to enhance financial reporting from businesses. The committee said the proposal would particularly affect a class of filers known as nonfarm sole proprietors. Audit data indicates that underreporting by sole proprietors was responsible for $68 billion of the annual tax gap, and that another class of filers, those who report rents and royalties, was responsible for $17 billion of the tax gap. Filers who reported less than $200,000 annually accounted for 90 percent and 78 percent of the underreporting in those categories, the committee estimated.

But together, those two classes of filers account for just 19 percent of the annual tax gap.

Other attempts to capture tax evasion and underreporting demonstrate that wealthy filers are far more responsible for the tax gap. A 2021 working paper from the National Bureau of Economic Research, examining data from 2006 to 2013, found that 36 percent of unpaid federal taxes are owed by the top 1 percent, and 72.6 percent are owed by the top 10 percent. About 27.4 percent of taxes owed are by the bottom 90 percent of taxpayers, or roughly households making under $200,000.

The paper also noted that while underreporting by sole proprietors is often caught by audits, other methods of hiding income are harder to detect.

Using the same methodology, the Treasury Department updated those estimates to reflect the latest tax data. That analysis found that the top 1 percent of taxpayers owed $163 billion in unpaid taxes, or about 28 percent, and the top 10 percent owed 63 percent, while the bottom 90 percent owed about 36 percent.

What Was Said

“How many waiters, waitresses, hairdressers, barbers, gig economy workers do you know that are making more than $400,000 a year? Why would they be targeted by this administration?”
— Senator Marsha Blackburn, Republican of Tennessee

This is misleading. Ms. Blackburn was referring to — and distorting — a proposal by the Internal Revenue Service to update existing voluntary programs for employers in the service industry to report tips. Efforts to do so began a decade earlier.

Tips have been subject to taxation for decades. Employees are required to report tips on their tax returns and to their employers, and to keep daily records of tips. Employers are required to retain tip reports, withhold taxes and pay their share of Social Security and Medicare taxes based on both wages and tips.

Since the 1990s, the I.R.S. and employers have used voluntary programs intended to improve compliance and streamline reporting. Employers are not obligated to participate, but those who do either agree to host quarterly compliance education programs and adopt a written reporting process, or to establish a standard tip rate. In return for ensuring compliance, the I.R.S. agrees to not examine prior pay periods.

Last week, the I.R.S. proposed an updated voluntary program that would incorporate technological enhancements and would eventually replace most existing initiatives for service industry employers. The agency began requesting comments on ways to improve the programs in 2013 and is soliciting feedback on the proposal until early May.

What Was Said

“When I offered my amendment to statutorily protect taxpayers making less than $400,000 from increased audits, all of my Republican colleagues stepped up and voted yes. No one on the other side voted yes.”
— Senator Michael D. Crapo, Republican of Idaho

This needs context. Mr. Crapo’s amendment to the Inflation Reduction Act sought to prevent the I.R.S. from using funding to audit taxpayers “with taxable incomes below $400,000.” No Democrat voted for it, and it ultimately failed to pass.

Democrats’ objection to the amendment hinged upon the words “taxable income.” A Treasury Department official told Reuters that such language would have shielded from audit wealthy people who report little income but tap into other sources of wealth.

“As Americans have learned recently, billionaires often have little or no taxable income for years on end,” Senator Ron Wyden, Democrat of Oregon, said in August, explaining his opposition. “So under this amendment, the billionaires who live off their borrowings would be immune from audit, and that would invite further tax avoidance.”

The nonpartisan Congressional Budget Office estimated that had the amendment passed, it would have reduced tax revenue by $4 billion, in part by encouraging underreporting of income. Moreover, the budget office said, the amendment was made redundant by a directive from Janet Yellen, the Treasury secretary, which committed to not raising audit rates for those making under $400,000.