Bonds

Municipal bond issuers would be drawn into a widely-cast net of beefed-up tax enforcement by the Internal Revenue Service under legislation proposed Monday by Sen. Elizabeth Warren, D-Mass.

The Restoring the IRS Act of 2021 would triple the IRS annual budget to $31.5 billion and make its funding mandatory rather than part of the annual discretionary appropriations process.

According to Warren, the overhauled funding stream would allow the IRS to fairly enforce the tax code, modernize its IT systems, and improve taxpayer services.

“For too long, the wealthiest Americans and big corporations have been able to use lawyers, accountants, and lobbyists to avoid paying their fair share – and budget cuts have hollowed out the IRS so it doesn’t have the resources to go after wealthy tax cheats,” Warren said in a press statement. “The IRS should have more – and more stable – resources to do its job, and my bill would do just that.”

Although Warren’s auditing target is millionaires and corporations, the overall impact would be felt in every department, including the Tax Exempt and Government Entities Division.

TEGE has suffered the same attrition as other IRS departments over the past decade as annual funding has not kept pace with inflation.

“Despite modest increases in recent years, the overall IRS budget is still 19% below its 2010 level, after adjusting for inflation,” the liberal-leaning Center on Budget and Policy Priorities reported last month. The report found that within the IRS funding for enforcement and operations support has fallen 21%.

Overall IRS enforcement staffing is down 30% from 2010.

“Even with the smaller number of agents on staff compared to prior years, the IRS has continued to move forward with audits of tax-advantaged bonds during this last year,” said Vicky Tsilas, former IRS branch chief of the Tax-Exempt Bond Branch for Financial Institutions and Products in the Chief Counsel’s Office who currently is a partner at Ballard Spahr in Washington.

The staffing decline has been recently reversed.

Congress last year gave the IRS a $409 million budget increase to $11.94 billion.

And the IRS recently advertised job openings for revenue agents in the TEGE division.

The Biden administration has set a goal of continuing to significantly increase the IRS budget in the coming years to ramp up enforcement and close the so-called tax gap between taxes owed and taxes paid.

The current tax gap “could approach, and possibly exceed $1 trillion” IRS Commissioner Charles Rettig told the Senate Finance Committee last month.

The last official estimate was an annual average of $441 billion from 2011 to 2013.

Rettig said the growth has occurred because new sources of wealth, such as trading in cryptocurrencies, are escaping taxation along with abuses of business income passed through as personal income.

The White House has requested a 10% IRS budget increase for fiscal 2022.

On the TEGE front, there was only one announced compliance priority for tax-exempt bonds announced during the first six months of the 2021 fiscal year that began Oct. 1.

The initial focus for fiscal 2021 involved potential arbitrage violations of Internal Revenue Code Section 148 by the investment of bond proceeds in higher-yielding investments beyond the allowable temporary period under Treasury Regulation (Treas. Reg.)1.148-2(e).

Only very recently has TEB announced two other priorities and a continuation of its fiscal 2020 priorities.

In fiscal 2020, the top IRS enforcement and compliance priorities were public safety and jail bonds, sinking fund overfunding, and variable-rate bonds.

The Tax-Exempt Bonds unit closed around 200 fewer examinations in fiscal 2020 than had been expected because of the interruption caused by the pandemic.

New examinations were suspended between March 2020 and last July because of COVID-19.

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