Treasury Secretary Janet Yellen emphasized the importance of improving tax law enforcement to help address the U.S. government’s nearly $2 trillion annual budget deficit.
Speaking at a press conference ahead of the 2024 annual meetings of the International Monetary Fund and World Bank, Yellen discussed how increased revenue from unpaid taxes is a key part of reducing the deficit.
When asked how the U.S. can continue to attract buyers for its debt, Yellen highlighted the need for fiscal responsibility and deficit reduction.
“It’s crucial that we stay on a sound fiscal path, which requires focusing on deficit reduction in the coming years,” Yellen stated. She also mentioned the importance of keeping the real net interest cost of the debt under 2%, close to historical levels.
One of the Biden administration’s strategies for reducing the deficit involves providing the IRS with more resources to close the estimated $7 trillion tax gap projected over the next decade.
This gap represents the difference between taxes owed and taxes collected. Yellen explained that a significant amount of taxes that should be collected are not, and the IRS is now working to address this issue.
Increased IRS enforcement, made possible by funding from the Inflation Reduction Act, has already begun to bear fruit. IRS Commissioner Danny Werfel highlighted the agency’s efforts in key areas such as underreporting and nonfiling by high-income individuals and corporations. Last year, the IRS reported that the tax gap had grown to $688 billion in 2021, with underreporting accounting for the largest share.
The Inflation Reduction Act boosted the IRS’s budget by $80 billion over 10 years, with a significant portion dedicated to enforcement. The focus has been on high-wealth individuals and corporations, areas where noncompliance tends to be higher.
With these additional resources, the IRS has successfully recovered $1.3 billion in unpaid taxes from individuals with delinquent tax debt.
Yellen also mentioned other deficit-reducing measures, such as the corporate alternative minimum tax and efforts to lower prescription drug costs for government programs. These initiatives, along with stronger tax enforcement, are part of a broader strategy to help close the deficit and maintain fiscal stability.
The results of this increased focus on tax compliance are already visible. Werfel noted that the IRS recovered over $1 billion from millionaires who failed to pay recognized tax debt and $172 million from high-income individuals who hadn’t filed returns in recent years.
By directing more resources to areas of compliance concern, the IRS is taking meaningful steps toward closing the tax gap and contributing to deficit reduction efforts.
