The Inflation Reduction Act just passed by the Senate and awaiting a House vote includes just under $80 billion for the IRS, with more than $45 billion of that to be used for tax payment enforcement.
Another $25 billion will go to operational support, almost $5 billion for new technology and $3 billion for services for taxpayers, including prefiling assistance and education, according to Congressional Research Service.
Another $15 million would be used to create a task force and generate a report on how the IRS could establish its own free, direct e-file system so that taxpayers could file their own taxes directly to the IRS without having to pay a third party.
The Congressional Budget Office estimated the bill will bring in $203.7 billion between 2022-2031.
Fox Business reported that lots of Americans worry that typical taxpayers will see a substantial increase in audits.
The potential for more audits and hassles with the IRS targeting average joes has been a recent talking point among Republicans in Congress, while Democrats have emphasized the need to collect taxes owed by wealthy tax scofflaws, including corporations.
Per The Hill, “Republicans have stated that the funding boost is going to be used to hire 87,000 new IRS agents. The number is likely speculative, and was picked up after the Republican National Committee cited a figure from the right-wing advocacy group Americans for Tax Reform.”
According to the article, ”Indeed, the agency is now in the process of a hiring spree, but it’s unrelated to the Democratic legislation. The IRS announced a plan earlier this year to hire 10,000 new IRS agents over the next two years to help it reduce a huge backlog of tax returns initially caused by shutdowns during the pandemic.”
The additional funding amounts to roughly $8 billion a year, stretched over 10 years.
In a letter to the Senate dated Aug. 4, IRS Commissioner Charles P. Rettig — a Donald Trump appointee whose term ends in November — wrote that the additional resources from the bill “are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans.” He said the Treasury Department directive is that audit rates not increase “relative to recent years for households making under $400,000.”
Instead, he said, the infusion of cash would help with the agency’s challenges, including “large corporate and global high-net-worth taxpayers — as well as new areas like pass-through entities and multinational taxpayers with international tax issues, where we need sophisticated, specialized teams in place that are able to unpack complex structures and identify noncompliance.”
He also wrote that without an increase in resources, the IRS has fewer trained, frontline tax examiners than at any point since World War II and fewer employees overall than at any time since the 1970s. Technological advances have not been enough to keep the agency from losing ground, he noted.
“The continued success of our country depends, in part, upon the success of the agency in appropriately, fairly and impartially enforcing the tax laws and providing meaningful, impactful services to every American,” Rettig wrote.
Hiring help, not just auditors
Time magazine rebuffed the notion the government is hiring a slew of agents to go after American taxpayers, noting the money is phased in over 10 years. The article cites a May 2021 Treasury Department report that “estimated that such an investment would enable the agency to hire roughly 87,000 employees by 2031. But most of those hired would not be Internal Revenue agents and wouldn’t be new positions.”
The Treasury Department said the hires would include IT technicians, taxpayer services support staff and auditors who would primarily go after corporate and high-income tax evaders.
Natasha Sarin, a tax policy and implementation counselor at the Treasury Department, told Time more than half of current IRS employees could retire now and likely will within five years. “There’s a big wave of attrition coming and a lot of these resources are just about filling those positions,” she said.
The funding is expected to add 20,000-30,000 new employees, far short of the 87,000 touted. That would put IRS staffing roughly where it was a decade ago — the agency reportedly had about 100,000 employees in the mid-2010s.
While financial cuts to the IRS have reduced ability to catch those who aren’t paying their share of taxes, it’s also reduced the agency’s responsiveness to taxpayers, including creating massive backlogs. Millions of 2021 tax returns are still to be processed — an unknown number of which are holding up refunds to taxpayers.
Who gets audited?
The agency’s auditing practice is of interest to American families. But so is collecting tax revenue to fund programs like education and infrastructure, including public transportation and roads.
And a lot of households are worried or frustrated by IRS backlogs and lack of customer service. Fast Company just reported that the IRS had a backlog of more than 17 million paper returns in July.
Some question whether the backlog will be dealt with before this year’s tax returns start piling on next tax season.
In the 2010s, audit rates for individual tax returns dropped from 0.9% to 0.25%, “with the audit rates for wealthier taxpayers dropping more sharply than in other tax brackets,” according to The Hill. The Government Accountability Office said the reason was that the tax returns of the wealthy are more complex and require more review, which wasn’t feasible with far fewer tax examiners.
The IRS said that under 5% of its audits targeted tax returns of the very wealthy, while 7% were of those with incomes between $1-10 million. As income fell, audits rose because they tend to be less complicated and time-consuming. So 11% of audits in 2021 were of those making between $200,000 and $1 million, while 26% of audits were those with incomes between $75,000 and $200,000.
More than half — 51% — were audits of people making no income to $75,000.
According to The Washington Post, “More than 4 in 10 of its audits targeted recipients of the earned income tax credit, one of the country’s main anti-poverty measures.”
CNBC’s Kate Dore reports that the IRS uses software to give tax returns a numeric score. Higher scores are more likely to trigger audit. “The system may flag a return when deductions or credits compared to income fall outside of acceptable ranges,” so someone making $150,000 who claims a $50,000 charitable deduction will get IRS attention.
Among reasons people currently get audited:
- When reported income doesn’t match W-2s.
- Claiming the earned income tax credit while self-employed can increase audit risk, but some note returns claiming the credit are routinely audited at higher rates.
- Claiming a home office can boost risk; be sure you have receipts and only use that room for business purposes.
- Rounded numbers may trigger an audit.