We’ve been skeptical of grandiose promises to close the so-called tax gap for years (here, here, here).  Part of that skepticism stems from the blatant self-interest of those making the estimates – we could raise billions, trillions, quadrillions if only you gave us more money! (Perhaps the CRS or JCT could be in charge of making these estimates in the future?)

Last week’s piece from The Hill is a perfect example.  Under the breathless headline, “Lucrative IRS program targeting wealthy tax cheats is withering from a lack of funds,” the article reveals many things, none of which are consistent with the headline.

First, far from lucrative, the program’s returns stink.  Here’s The Hill:

The Finance Committee report found that since 2007, the whistleblower program has brought in almost $6.5 billion while paying out just over $1 billion in rewards.

Despite those soaring returns, the number of investigations opened by the IRS as a result of the program has fallen from 43 in 2014 to just six in 2020, according to the report. 

Revenues from the program have also been falling, down to $245 million collected from noncompliant taxpayers in 2021 from $1.4 billion in 2018.

Six-and-a-half billion in 15 years?  Oooh.  Cuing Dr. Evil.  Seriously, that’s less than $500 million a year, or enough to fund the federal government for about an hour.

Second, notice the cherry-picked statistics?  We are told collections in 2021 were only one-sixth of those in 2018.  But 2018 was a banner year for the program and an obvious outlier.  When you compare 2021 collections to the program’s average (again, around $500 million annually), the reduction is much more in line with normal variations.  Moreover, the budget cuts to the IRS began a decade ago – shouldn’t the reduced funding have depressed 2018 collections, too?

Third, where’s the meat?  This program encourages Americans to snitch on their neighbors, colleagues, and employers with really substantial rewards and all they can gin up is a few billion over 15 years? What happened to all those billionaire tax cheats the IRS has promised?

As we’ve noted in the past, the reality of the tax gap is much more complicated than the Marvel Comic version being peddled by the IRS and its supporters.  First, much of the gap is from taxpayers who are broke and unable to pay anything, let alone a large tax debt. Second, much of the debt is owed by lower-income Americans and would require lots of enforcement to collect relatively small amounts.

And third, a not insubstantial amount is the result of disputes between the IRS and taxpayers. In those cases, they count the amounts in dispute as part of the tax gap, even when the taxpayer prevails.  Let that sink in for a second: in cases where the IRS is wrong, they still add that amount to the tax gap estimates.

All of which is why former Finance Committee staffer Dean Zerbe’s comment should have been the story’s headline:

I don’t think people realize how much the IRS kind of shoots blanks, meaning that they audit folks and it just kind of comes up to zero or next to a zero. The whistleblower program is much better at really targeting the bad actors,” he said.

The program itself is designed to go after the big-dollar folks. The way that the law is structured, it kicks in for major corporations, for wealthy individuals and very wealthy individuals,” he added.    

How are those comments consistent with the rest of The Hill’s story, or the recent tax gap narrative?  If most IRS audits turn up little or nothing, how will more audits produce the windfall promised by the Inflation Reduction Act?

And if the whistleblower program is so much better at targeting the cheats than random audits, why does it produce relatively miniscule amounts of revenue? Either it’s not that great of a program, or the tax cheats aren’t really that rich or prevalent.

None of this makes any sense and it all points to the ultimate futility of all that new IRS funding.  The US tax code relies on Americans paying their taxes in good faith and, with some exceptions, it works very well.  Our compliance rate is among the highest in the world, after all.

But good faith works in both directions.  It requires a tax code that’s fair and understandable, and an enforcement agency that helps taxpayers comply with the rules – rather than targeting them as tax cheats.

With that in mind, we’ll go out on a limb here and predict that more whistleblowers and thousands of new, poorly trained auditors are not going to result in the predicted revenue windfall. It will, however, severely undermine the good faith necessary to make it all work.