AFP: $80 Billion to Audit Businesses and Wealthy in Biden Plan
On April 28, 2021, President Biden presented the “American Families Plan” (AFP), an ambitious spending program focused on providing family leave, child care and nutrition, health care, preschool and college education to millions of Americans.
According to the Biden Administration, the AFP would cost $1.8 trillion and would be financed with increased taxes on high income Americans.
A key component of the funding for the AFP proposal is increased revenue through a focus on tax compliance for high-income taxpayers. The administration has noted that, from 2011 to 2018, the audit rate for those making over a million dollars per year fell by 80 percent and that, today, taxpayers are more likely to be audited if they live in the Mississippi Delta than if they live on Park Avenue.
The Biden administration’s renewed scrutiny on high earners would have two parts. First, financial institutions would be required to report information on account flows so that earnings from investment and business activity are subject to increased transparency. This data will help the Internal Revenue Service (IRS) improve how it selects potential tax evaders for audit. Second, the plan would include $80 billion of mandatory appropriations to the IRS over 10 years to fund an uptick in audits and tax compliance measures for those with the highest incomes. The focus would be large companies, businesses, estates and higher-income individuals where, the administration claimed, the majority of underreporting and tax non-compliance currently occurs.
The administration estimates that these measures could collect an additional $700 billion in tax revenue, representing about 38% of the $1.8 trillion cost of the AFP. In part, increased IRS funding would represent the restoration of resources to the Service, the budget of which has been cut multiple times over the last 10 years. The Congressional Budget Office reports that from 2010 to 2018 the IRS budget fell by 20 percent and its staff declined by 22 percent. In particular, it notes that funding and staff dedicated to enforcement fell by nearly 30%. Audits of individual and corporate income tax returns fell by 46% and 37%, respectively.
Increased audits may be viewed as low-hanging fruit by lawmakers seeking ways to fund government spending without raising taxes on the middle class. As estimated by the administration, each $1 invested in tax enforcement will yield $7.75. Not only would a focus on audits yield big returns, but it also would be easy to support politically. Thus, it is reasonable to expect that increased audits have a good chance of remaining part of the plan.
What does this mean for those who may have taken aggressive tax positions in the past? Such businesses and individuals will need to assess whether their past returns place them at an unacceptable risk. This risk includes the potential for a civil enforcement action and, in some circumstances, a criminal investigation. Those who harbor concerns about their previous tax positions, or their business’s previous tax positions, should consider seeking experienced legal counsel to help assess their risk and design a proactive response.