July 16, 2021
Federal Policy Director
July 16, 2021
As congressional Republicans cut the IRS budget over the past decade, corporations dramatically increased their use of tax breaks that they publicly acknowledged were unlikely to withstand scrutiny by tax authorities, according to the Washington Post.
Budget cuts starting in 2010 have forced the agency to reduce its audit rate for corporations with $20 billion or more in assets from 98 percent to 50 percent. The Washington Post found that during the decade, the amount of “uncertain tax benefits” claimed by corporations increased 43 percent, from $164 billion in 2010 to $235 billion in 2020.
Uncertain tax benefits are the tax savings that corporations are required to disclose, under accounting rules, that tax authorities are likely to deny upon scrutiny. But for some time ITEP has sounded the alarm as corporations announce that they are often allowed to keep these tax benefits—not because they have been approved by tax authorities but because the statute of limitations ran out before tax authorities investigated, which can happen in just three years.
Many technical details of tax enforcement are worth debating, but at a bare minimum, we should expect tax authorities to investigate corporations that publicly announce they have taken questionable tax breaks. But, thanks to the cuts in the IRS’s enforcement budget, even this is apparently too much to ask.
For example, ITEP found that ExxonMobil announced that it was allowed to keep $279 billion in uncertain tax benefits in 2019 and $237 million in 2020 because tax authorities did not come to any conclusions before the statute of limitations ran out. As we have previously written, ExxonMobil’s relationship with tax authorities is like a child telling her parents, “I just did several things you will not approve of,” and the parents not finding the time to investigate.
Fortunately, the Biden administration has proposed to restore IRS funding and increase audits of corporations, as well as individuals with incomes of more than $400,000. It is hard to understand why there is any debate over this. After all, funding tax enforcement clearly pays for itself many times over, and the proposal would not increase taxes but would improve collection of taxes that are already due under current law.
While lawmakers may haggle over details of exactly how to improve tax enforcement, it seems beyond debate that corporations are providing a roadmap to their possible tax dodging by announcing their uncertain tax benefits, which should receive extra scrutiny from a more muscular IRS.