IRS estimates of unpaid taxes are 'unfounded,' says Rep. Kevin Brady

Rep. Kevin Brady said the IRS shouldn't receive more enforcement funding because estimates of unpaid taxes are "unfounded."

President Joe Biden has proposed investing $80 billion in new technology and more auditors to increase tax collections by $700 billion over 10 years. IRS Commissioner Charles Rettig testified before Congress in April that the "tax gap" -- or amount of taxes owed that go unpaid each year -- could be as high as $1 trillion due to cryptocurrency, offshoring and underreporting of income. IRS data from 2011 to 2013 estimated the tax gap at $441 billion a year.

In an interview on CNBC's "Squawk Box," Brady, the top GOP member of the House Ways and Means Committee, said Republicans "want to close the tax gap." But he said the president's proposal and similar legislation introduced in Congress aimed at beefing up IRS enforcement is flawed.

"This proposal is based on an unfounded issue, which is 'what is the tax gap?'" he said. "The IRS will admit their data is 7 years old. They're guessing about crypto currencies and foreign transactions. What they're saying is give us a ton of money, let's hire a bunch of auditors and we think this will create revenue. But we've seen already one of the problems is, it's not going to create that revenue."

Instead, Brady proposed a "thorough analysis" of the tax gap and what's causing it. "Then together let's direct the solutions to the problem."

Democrats in Congress contend that funding the IRS and collecting more taxes already owed are key to generating revenue and enforcing the tax code. Due to a lack of funding, the number of IRS revenue agents has fallen by nearly a third over the past decade and audit rates for taxpayers who earn more than $1 million a year fell by half between 2010 and 2018, according to the IRS.

Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, said one reason the IRS' published data on the tax gap may be outdated is because Congress has reduced IRS funding. "One thing the IRS could do with more funding is publish the more current data about the tax gap that Mr. Brady wants," he said.

Gleckman said even if the tax gap is half the IRS estimates, which is unlikely given lower audit rates, "does that mean Congress should not give the IRS the resources it needs to be sure that people pay the taxes they owe?"     

Some Republicans have contended in the past that the IRS should collect existing taxes before Democrats discuss raising tax rates. During the Trump administration, Treasury Secretary Steven Mnuchin said "fixing the tax gap" was one of his top priorities and he pushed for more funding to improve audits on the wealthy.

In response to the Biden plan, many Republican leaders and lower-tax advocates say the IRS is ineffective, overly intrusive and overly political -- as proven, they say, by the tax data on wealthy taxpayers obtained by ProPublica. ProPublica began publishing a series of articles in June showing how billionaires like Jeff Bezos, George Soros and others pay lower tax rates -- and in some cases no taxes in certain years -- due to loopholes in the tax system. ProPublica says it does not know the anonymous source of the IRS tax data.

Brady said that even with more funding, the IRS hasn't proven it has the ability to close the tax gap.

"The truth is, the IRS does not have a good record on smart auditing and smart recovery," Brady said.

A provision in early versions of the bi-partisan infrastructure bill included funding to boost IRS collections by an estimated $100 billion over 10 years to help pay for the infrastructure projects. The provision was stripped from the bill due to opposition from Republican negotiators. It will now likely be rolled into the broader reconciliation bill being pushed by Democrats.