By DANIEL J. PILLA, Prudent Money contributor
Warren is selling the Ultra-Millionaire Tax Act of 2021 as a crackdown on the super-rich. But in truth, it will likely hit ordinary Americans the hardest.
On March 1, Senator Elizabeth Warren (D., Mass.), joined by Representatives Pramila Jayapal (D., Wash.) and Brendan Boyle (D., Pa.), introduced the so-called Ultra-Millionaire Tax Act of 2021. The bill would impose an annual “wealth tax,” starting at 3 percent and reaching as high as 6 percent, on the richest .5 percent of all Americans.
The merits of the tax itself have been discussed at length. What has not been discussed is the new IRS-enforcement scheme that the bill would create, which would include a staggering increase in the size of the IRS, a substantial expansion of the IRS’s already-oppressive information-reporting requirements, and many more audits and collection actions.
Let’s examine these elements more carefully.
The bill proposes to increase the IRS’s funding by $100 billion over the next ten years. To put this in perspective, the IRS’s FY 2021 budget is $11.92 billion, up by $409 million from FY 2020. Warren’s bill would nearly double the agency’s funding for FY 2022, and leave it nearly ten times bigger by 2031.
What’s more, the bill stipulates that 70 percent of the new money must be used for tax-law enforcement, compared to just 10 percent allocated for “taxpayer services” such as pre-filing assistance and education, filing and account services, and taxpayer-advocacy services. Again, for perspective, the IRS’s FY 2021 budget allocates $2.556 billion for taxpayer services and $5.213 billion, or just about twice as much, for enforcement activities such as audits, collections, litigation, and criminal investigations. Warren’s bill would give the IRS seven times more money for enforcement than for taxpayer services.
This huge imbalance betrays the leftist mantra that “government is here to help you.” If that were true, more money would be spent on giving people the information they need to comply with the massive four-million-word tax code than on after-the-fact enforcement. Yet for decades, spending on enforcement has outpaced spending on education — and Warren would make the imbalance much worse.
While it’s admittedly naïve to believe that enforcement is unnecessary, the fact is that 98 percent of every dollar owed to the IRS is paid without the need for any agency intervention. People screw themselves into the ground working to comply with our massive tax code. In 2019, over 67 million Americans sought some form of compliance help from the IRS in some capacity; just 1,800 were charged with a tax crime.
Clearly, the IRS has much more to gain by teaching people to comply than by grinding them into powder if they don’t.
Expanded Information-Reporting Requirements
Speaking of being ground into powder, one of the IRS’s chief compliance tools is “information reporting,” which comes from the “information returns” the IRS uses to collect data. Form W-2, which reports wages paid by an employer to an employee, and 1099 forms, which report interest, dividends, independent-contractor payments, etc., are two prominent examples of such “information returns.” But there are literally dozens of other forms that the IRS uses to collect data so that it can verify the income reported on tax returns.
The scale of that data is staggering. In 2019 alone, a total of 3,503,499,195 information returns were filed with the IRS. The U.S. population in 2019 was 328,239,523, meaning that more than ten information returns were filed with the government for every man, woman, and child in America in 2019 — not even counting income-tax returns. Yet according to Warren, it’s not enough.
Under her bill, within twelve months of enactment, the IRS must create a palette of new regulations designed to force the reporting of “any information concerning the net value of assets” that the agency deems relevant. The reporting burden may be based on “ownership, control, management, claim to income from, or other relationship to assets” subject to taxation under the law, including “financial institutions, business entities or other persons” with any connection whatsoever to persons liable for the tax. Moreover, business entities owned by persons subject to the tax must “provide estimates of the value of the [business] entity itself.” And in case you’re planning on avoiding the new requirements, the bill further provides that the IRS is empowered to write new regulations specifically deemed “necessary to prevent taxpayers from avoiding the purpose of information reporting.”
Now, a reasonable person might ask whether all this data might not simply overwhelm the IRS, making enforcement of reporting requirements untenable. Well, the “We’re Here to Help” crowd thought of that also: The law would direct the IRS to “develop a comprehensive plan for managing efforts to leverage data collected” to enhance compliance efforts, with the stated goal of addressing “noncompliance with such requirements.”
Increased Overall Enforcement
In 2019, there were 154.1 million individual tax returns filed. Warren’s wealth tax is directed at only the richest .5 percent of filers. Do you think the IRS needs a doubling of its budget to handle just .5 percent of America’s taxpayers? No, friends, the enforcement component of the Ultra-Millionaire Tax Act of 2021 is not just for ultra-millionaires. It’s for you.
If Warren’s bill passes, you should expect the IRS to hire legions of new auditors and tax collectors who’ll be turned loose on American taxpayers over the next ten years. As the tax code becomes more voluminous and complex, more people make honest mistakes in calculating their taxes. This reality leads to tens of millions of penalty assessments. In 2019, the IRS assessed over 40 million civil penalties. Nearly 33 million were assessed against individuals, the vast majority of whom are honest taxpayers caught in tax-code booby traps and potholes they didn’t even know existed. Those same people then became the targets of a blizzard of IRS notices and payment demands, and, if that fails, eventually, tax liens and levies. Ultra-millionaires tend not to have this problem; they can afford to just pay their taxes because they’re ultra-millionaires. But when middle-income Americans fall into tax debt, they become enforcement victims precisely because they don’t have the money to settle up.
And that’s the most sinister thing about Warren’s bill: It purports to be a crackdown on the richest Americans, but in reality, will most likely hit ordinary taxpayers the hardest. DANIEL J. PILLA is a tax-litigation specialist and author of 15 books.
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