As IRS funding dwindles, California’s wealthiest can breathe a little easier

photo illustration of a $100 bill with holes in it.  Ben Franklin eludes a taxman in the holes

(Illustration from the Los Angeles Times, photos via Getty Images)

Californian millionaires and billionaires who faced the full auditing power of a revamped Internal Revenue Service can breathe a little easier, thanks to congressional Republicans.

This week, President Biden signed a bill that cuts a planned $80 billion increase in agency funding by $21 billion — a key GOP request as part of the bipartisan deal to raise the federal debt ceiling.

The audits that would have been funded by these new funds could have hit wealthy Californians hard. About half of the $80 billion would have gone to increasing tax compliance for Americans with incomes over $400,000 a year, with the rest of the money going to improve the agency’s taxpayer services and modernize its archaic technologies. California, which has more millionaire households and more billionaires than any other state and holds 17% of the country’s wealth despite having only 12% of its population, was facing an inordinate share of the new measures. ‘execution.

“These cuts are great news for wealthy tax cheats and bad news for the rest of us,” Vanessa Williamson, senior fellow at Brookings, a Washington-based public policy think tank, wrote in an email. mail.

IRS funding cuts will likely reduce government revenue by $2.3 billion over the next 10 years, causing the federal deficit to rise by $900 million, according to a report by the nonpartisan Congressional Budget Office.

That money will instead stay in the pockets of wealthy Americans. Without adequate funding for law enforcement, government officials struggle to collect taxes from the super-rich, said Joe Hughes, federal policy analyst for the Institute on Taxation and Economic Policy. The returns of many wealthy households are complicated and auditors have to navigate “extremely complex business entities” with hundreds or thousands of sub-entities.

“It’s a very difficult puzzle for an IRS agent to put together,” Hughes said.

Some experts say spending more money on paying taxes for wealthy Americans is a waste of energy.

“High-income taxpayers are more likely to receive expert tax advice, and therefore less likely to make mistakes,” wrote Chris Edwards, a policy scholar at the libertarian Cato Institute, in congressional testimony that urged legislators not to spend so much money on additional expenses. application of tax under the debt ceiling agreement. “More aggressive IRS enforcement would increase taxpayers’ costs because they would invest more time and energy defending themselves.”

According to a recent estimate, Americans already spend some $14.4 billion a year on tax preparation services alone.

But the fight to collect the taxes the wealthiest Americans owe is particularly fierce in California, a hot spot for what author and Oscar Mayer heir Chuck Collins calls the wealth defense industry, the complex of law, accounting, and money management firms that work to ensure America’s wealthiest people stay that way. The government is “completely overwhelmed,” says Collins, who gave away his fortune at 26 and is now a senior fellow at the Institute for Policy Studies, a Washington-based progressive think tank.

The heirs of J. Paul Getty, the oilman who amassed one of California’s most famous fortunes, maneuvered their wealth in an effort to limit the amount of taxes they paid, The New Yorker reported in January . Kendalle and Sarah Getty, according to the magazine, went out of their way to convince tax collectors that they weren’t living or doing business in the Golden State to avoid state taxes. The Getty trusts were established in California, but Kendalle and Sarah’s trust moved to Nevada. Robert Leberman, a trustee of the Gettys’ trust, told the magazine at press time that the family intended to “fulfill all tax obligations”.

California’s tax collection service, the Franchise Tax Board, doesn’t have the “expertise” to track this kind of “innovation” in the industry, Collins said. A fully funded IRS is needed for this, he said.

“California has an incredibly volatile tax base, so we’re at the mercy of wealthy people,” said Rep. Sydney Kamlager-Dove of Los Angeles, a Democrat who voted against the president’s deal with Republicans. “And now, on top of that, we’re coupling that with the federal government’s ability to prosecute them to make sure they pay what they owe.”

Republicans, however, have pledged to go further in cutting funding for the agency.

“We’re not going to stop until we remove the rest of the IRS officers,” House Speaker Kevin McCarthy (R-Bakersfield) told reporters in a triumphant speech after the House passed the bill partially repealing the new funding. “I promise you I’ll be back next year and next year and next year. Because I believe the government should be there to help you, not prosecute you.

Now the tax collection agency has been thrown into a state of uncertainty. In the immediate term, the bill canceled $1.4 billion already given to the agency; it also asks lawmakers to divert $20 billion to other non-military spending programs over the next two years. Proponents of IRS funding hikes say Democrats should fight to keep the dollars alive, especially because the agency only recently emerged from a decade of devastating cuts. The IRS budget shrank by $2 billion between 2010 and 2017, a loss that in turn reduced government revenue by tens of billions of dollars, according to an estimate by ProPublica.

Without clear indicators of the state of its funding, the IRS has little impetus to launch a crackdown, said Janet Holtzblatt, senior fellow at the Urban-Brookings Tax Policy Center. After all, next year’s funding is uncertain, especially since Republicans have made it a priority to continue pushing for further cuts. That uncertainty is heightened by the fact that the cuts came less than a year after the initial $80 billion was paid to the agency, she added.

“Nine months later, you’re already seeing a 27% reduction in that $80 billion in funding,” Holtzblatt said. “Is there a guarantee that Congress won’t come back and cut funding? … From a managerial perspective, this kind of uncertainty can dampen enthusiasm for hiring additional staff and investing in technology.

The fate of the IRS will ultimately be tied to the fate of the Democrats’ ability to control Congress. Rep. Adam B. Schiff (D-Burbank) said if his party manages to retake the House in 2024, the tone of government spending negotiations could change, with IRS funding extensions back on the table .

Schiff has his own suspicions – that while the IRS is attacking the ultra-rich, the ultra-rich are attacking the IRS. In America, tax evasion is a bipartisan pastime. But Schiff said Republicans in particular are at the mercy of ultra-wealthy donors and those donors don’t want to be audited.

“If you cut off IRS funding, like the Republicans are trying to do, it helps their wealthy and their corporate donors across the country,” Schiff said. “And that’s really what they’re talking about.”

This story originally appeared in the Los Angeles Times.

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