They say you have to spend money to make money, and when it comes to raising tax revenue, President Biden sure has taken that to heart. He wants to increase the IRS’ budget by $80 million — a move he claims will raise $700 million in additional federal revenue over the next 10 years. And Democrats looking to fund their $3.5 trillion spending package will likely back his plan. Biden’s logic is simple enough: Giving the IRS more money allows them to increase audits on citizens and businesses and thereby raise revenue.
However, the IRS will not use the bulk of these dollars to go after large multinational corporations, as Democrats wouldhave you believe. Instead, recent IRS announcements suggest that the agency will target small businesses and make them pay for this government spending spree.
It couldn’t come at a worse time, as these small businesses struggle to recover from a pandemic that forced many to close their doors for good.
Increasing the IRS’ budget has long been one of the priorities of President Biden to decrease the “tax gap” — that is, the amount that taxpayers legally owe the government that’s not actually paid in taxes. Not all of the tax gap is due to intentional tax evasion; some is due to honest mistakes made by taxpayers trying to navigate the thousands of pages that is the internal revenue code.
While Biden’s $700 million figure is likely overblown, it’s true that increasing IRS funding will raise revenue. But this money will be taken primarily out of the pocket of small businesses through complicated audits and a legal process that stacks the deck against them.
This shouldn’t surprise anyone. The IRS already warned us about this in late 2020, when the agency said it would increase audits against small businesses by 50 percent.
Why would the IRS target small businesses instead of mega-corporations? The reason is simple: small businesses are easy to beat in court.
When the IRS corrects a business’s tax returns and finds a deficiency in the taxes it owes, the business is guilty until proven innocent. That’s because of a 1933 Supreme Court decision that established the IRS’ determinations of taxpayer obligations are deemed correct by default. It’s the taxpayer who has to prove that the IRS is wrong.
This decision incentivizes the IRS to go fishing in businesses’ books. After all, the more corrections it makes, the more deductions the taxpayer has to prove they took correctly. In the long run, that means the IRS earns more revenue. Depending on the nature of the deduction, the records needed to beat the IRS can be nearly impossible to provide for businesses who lack an in-house accountant or tax attorney. We’re talking justifications for every hotel expense on a business trip, or the specific details of what was discussed at a business lunch.
Many small businesses cannot afford the accountants and excellent record keeping that is required to beat the IRS. These business owners are just trying to navigate the ever-growing complexity of the business tax code while trying to run their business. Keeping records of every expense they’ve ever incurred isn’t their number one priority. That was especially true during the pandemic, when most business owners were fighting just to stay open in the face of mandatory government shutdowns.
The deck is stacked against small businesses in the audit process, and the IRS knows it. Most of these businesses are not tax cheats; they’re just hardworking Americans trying to keep their doors open and provide for their families.
Any congressmen who actually think additional IRS funding will be used to target large multinational corporations are kidding themselves. These companies can hire the best tax attorneys — much better than the ones working for the IRS. The IRS rarely beats them in court. The IRS did receive a $3 billion victory against Coca-Cola in 2020, but that marked thefirst time ever that the IRS won a case on a major international tax issue. Auditing small businesses that it knows have a more difficult time keeping up with the intense record keeping the tax code requires will remain the IRS’ bread and butter.
The IRS does need a bigger budget, just not for tax enforcement. The IRS is woefully understaffed, which is the reason it only answers 3 percent of phone calls made by hardworking taxpayers trying to comply with the monstrosity that is the tax code. Any additional revenue appropriated to the IRS should go to addressing necessary measures like this that will actually improve the agency.
Because of Supreme Court precedent and tax rules, it is tough for small businesses to beat the IRS. They simply don’t have the resources to take on the IRS and win. The agency knows this and will use additional revenues designed for tax enforcement to audit your neighborhood business.
Any small business that survived 2020’s economic downturn should be commended and awarded. But if the Democrats plan to fund the IRS as a revenue raising tool gets passed, these businesses will soon have an IRS agent knocking on their door.