The yawning tax gap in the US – the amount of tax that goes uncollected every year – has led to tax authorities asking for more money to tackle the problem.
The Internal Revenue Service (IRS) says it needs an extra £650 million to employ more investigators and to help enforce the collection of the estimated £300 billion that is missing from its tax take.
New investigators will also look more closely at offshore tax havens which is why the controversial Foreign Account Tax Compliance Act (FATCA) was brought in to make hiding cash and assets outside the US more difficult.
FATCA is aimed at making foreign financial institutes divulge the details of their US taxpaying clients who have more than $50,000 in assets.
The IRS says the tax gap is increasing, mainly because of underreporting, but they don’t have the staff or resources to investigate cases thoroughly or more widely.
Staff and budget slashed
The agency says that with more staff they can check more returns of corporations and individuals and compare those with the financial reality.
However, against a backdrop of the government demanding tougher action from the IRS in cracking down on tax dodgers and evaders they have had to do so with fewer resources.
In the last two years the IRS has shed 5,000 employees and seen its budget slashed.
In addition, IRS staff have had to take the equivalent of one week of unpaid holiday to help the agency balance its books which has been an unpopular move.
Indeed, the agency regularly stages a complete shutdown of its offices, hotlines and help centres because of the US government budget cuts which came into effect in March.
Now with a budget of around £8.5 billion the IRS is vowing to be tougher with tax enforcement, particularly in offshore issues.
The IRS also says its level of customer service will improve since they will employ more people to deal with queries from the public.
Starved of funds
The agency also believes that by improving its help centres and having more workers interact with tax payers will help improve tax compliance.
However, the IRS is being starved of funds – its training budget has been slashed by 83% since 2010 and it has shrunk in size by nearly 20% in 10 years.
Against this background of cutbacks it appears that money being hidden in offshore tax havens is now a prime target.
That’s because the IRS can claw back billions of tax dollars for a relatively small investment in time, resources and manpower.
The agency estimates that for every dollar they spend on enforcement, they get $5 in return – though with the upcoming offshore crackdown that figure looks set to rise much higher.