The Inflation Reduction Act is adding 87,000 IRS agents. With current staffing at 79,000, this more than doubles the IRS roster. This will return IRS personnel numbers to 1990 levels. The argument for the increase is tax enforcement of wealthy individuals and corporations.
The projections and arguments may not hold up when analyzed. How will increasing IRS staffing affect all Americans?
Increases to IRS Staff and Systems Development
The Inflation Reduction Act earmarked $80 billion to fund the IRS staffing increase. According to the H.R. 5376—Inflation Reduction Act, these dollars will go to “taxpayer services and enforcement.” It also will be applied to developing a free direct e-file system and business systems modernization.
The Congressional Budget Office (CBO) confirms the spending will take place over the next 10 years and more than double the current staffing.
Over 50 Percent of Budget for Enforcement
Enforcement is the largest part of the funding based on the dollar allotment. It is projected that $45.6 billion of the $80 billion budgeted will be used for enforcement.
The stated target of this enforcement is individuals who earn more than $400,000 annually and large corporations. According to the CBO, the anticipated revenue from unpaid taxes, penalties and fines is estimated to be $200 billion over the next ten years.
The IRS has estimated a five to nine return on investment. In other words, that’s five to nine dollars in increased revenues for every dollar spent. But who’s paying for this?
Auditing Might Increase to ‘Historical Levels’
U.S. Secretary of the Treasury Janet L. Yellen reinforced the $400,000 earnings requirement in a letter to Chuck P. Rettig, commissioner of the IRS. In the letter she wrote, “I direct that any additional resources—including any new personnel or auditors that are hired—shall not be used to increase the share of small business or households below the $400,000 threshold that are audited to historical levels.”
The keywords may be “audited to historical levels.” In the 1990s, IRS, staffing levels matched the level currently proposed. At that time, the overall percent of returns audited was 1.67 percent. For example, in 1995, 1.60 percent of individuals earning under $100,000 were audited. In 2021, the overall audit rate was 0.4 percent. The point is that the higher “historical levels” significantly increase over what the U.S. taxpayers are currently experiencing.
Who’s Going to Be Targeted
Yellen stated that the increased enforcement would only affect corporations and individuals with $400,000 income and over. So, how many taxpayers are in this group? Those earning $400,000 or more make up roughly 1 percent of the U.S. population. This group, the “one percenters,” equals approximately 335,242 people.
To make that $200 billion revenue goal off these 335,242 individuals, each person must be audited and found to owe additional taxes. The approximate delinquent tax bill per individual would have to be around $956,584. Although growth rates should be factored in, this gives a ballpark figure of what needs to be generated over the next 10 years.
Lower-Income Individuals Targeted
Despite the proclamation from Yellen, the numbers show that lower-income Americans will need to be audited to make up the $200 billion revenue projection.
Currently, those individuals earning $25,000 or less are audited five times the rate of any other group. Their total percent of audited returns in 2021 was 13 percent. The reason for the additional audits was a congressional mandate that the IRS reduce non-compliance in the Earned Income Credit program. This congressional mandate hasn’t changed with the passing of the Inflation Reduction Act.
An Audit Costs Time and Money
When Americans start receiving notifications from the IRS that they are being audited, they’ll need to grab their checkbooks. Defending yourself against an audit is expensive.
Hiring a tax attorney for a simple audit defense can cost $2,000 to $3000. A more complex audit will cost around $3,000 to $6,000. And a small business could see spending more than $7,500 to defend themselves against the IRS.
Percentage of Funding for Taxpayer Services
While the proponents of the IRS are emphasizing enforcement, taxpayer services languish. For instance, in 2021, out of 27 million calls made to the IRS, only 2.7 million were returned. And by August 2021, there was a backlog of 9.7 million unprocessed returns from 2021. So how much of the $80 billion IRS funding is allotted to taxpayer services? Here’s a breakdown:
- Enforcement: $45.6 billion
- Operations Support: $25.3 billion
- Business systems modernization: 4.7 billion
- Taxpayer services: $3.1 billion
Although some of the backlog is due to the pandemic closures, manual processing has slowed down the rate of returns being processed. The combination of systems modernization and taxpayer services’ is only 3.9 percent of the $200 billion budget. The question is, will this percentage be enough to provide improved tax services to the American people?
Middle America May Face IRS Audits
The CBO’s proposed $200 billion revenue projection will need to come from more than the “one percenters.” According to the CBO’s September 2022 report on the additional enforcement funding, the rate of audits “would rise for all taxpayers.” So, audits may increase, while taxpayer services continue to be shortchanged.
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