The proposed $2.4 trillion reconciliation bill includes $80 billion for increased Internal Revenue Service (IRS) funding. The Democrats want to beef up the tax agency and expand its powers. The aim is to raise revenues by reducing the tax gap, which is the amount of taxes legally owed but not paid.
The large funding increase would double the IRS workforce, according to the Congressional Budget Office (CBO). About three‐quarters of the increased funding would go toward enforcement.
Supporters think that greater enforcement would be good policy because the expected higher tax revenues would outweigh the cost of higher IRS spending. But that ignores the higher costs that would be imposed on the private sector, including tax compliance burdens and a loss of civil liberties. More aggressive IRS enforcement would mean more paperwork, more lawyer fees, more time consumed on tax matters, and more anguish and uncertainty for taxpayers. It could also result in less privacy and personal financial security. These private costs are difficult to measure, and are usually ignored by policymakers.
With IRS enforcement, there is a trade‐off between the benefits of a lower tax gap and the costs to society of achieving it. If we wanted a tax gap of zero, we could hire an army of IRS agents to routinely search every home and laptop in the nation and impose root‐canal audits on everyone. But people in democracies do not accept that level of government intrusion, and so every tax system has a tax gap.