The IRS wants to spend billions "Enforcement." Here’s who is most likely to be audited. – CBS News | Vette Leader

One of the most annoying rates for taxpayers is “IRS audit,” but years of underfunding and a decline in the tax agency’s staff have brought the audit rate up to par Decade low. That could change under the soon Anti-Inflation Actthe bill proposing to give the IRS $80 billion to improve enforcement and hiring.

The prospect of a revival of the IRS is sparking some dismay from some Republican lawmakers and taxpayers, who have expressed concerns that the proposed funds could be used to benefit middle-class workers and families. In fact, Republicans on Tuesday warned taxpayers that the agency plans to “hire 87,000 new IRS agents to screen Walmart buyers.”

While the estimate of 87,000 new employees isn’t entirely accurate, the anti-inflation bill would inject some much-needed funds into the IRS. Under the plan, about $46 billion of that $80 billion would be spent hiring more law enforcement officers as well as overseeing cryptocurrency taxes, a relatively new area for the IRS.

This has sparked fears that the new agents would target middle-class workers with invasive scrutiny, although the Treasury Department cracked down on those concerns on Wednesday.

Households earning less than $400,000 “are likely to see an opportunity for an exam drop,” the Treasury Department said in a statement. “Instead, new funds will crack down on tax dodgers among the wealthy and big corporations, invest in technology upgrades that help taxpayers, and hire more account managers to avoid backlogs.”

The IRS declined to comment on its hiring plans to CBS MoneyWatch, noting that it would not comment on pending legislation. The Anti-Inflation Act passed the Senate on Sundaywhile House lawmakers could vote on the bill as early as Friday.

“Anytime people hear that the IRS is going to do more audits, they’re going to be concerned,” noted Eric Bronnenkant, chief tax officer at financial services firm Betterment. But, he added, “I would argue that for people whose only income is a W-2 and maybe $100 in interest from their bank account, exam rates are unlikely to increase dramatically.”

Here’s what you should know about audits and proposed IRS funding.

Why does the IRS need $80 billion?

The Inflation Reduction Act would invest $370 billion to fight climate change and $64 billion to reduce costs for people with Affordable Care Act health plans. To pay for that, Democrats want the IRS to step up scrutiny and enforcement efforts to salvage billions currently being lost in the so-called tax loophole.

There is a “gap between taxes collected and taxes actually owed, and the government has an interest in closing this gap,” Bronnenkant said. “One way to fill this gap is through increased enforcement of existing laws.”

The inflation bill would direct $80 billion to the IRS, with $45.6 billion going primarily to enforcement. The remaining money would be spent upgrading the agency’s technology and operations, which was plagued by delays and poor customer service.

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Would the IRS Really Hire 87,000 New Agents?

That’s a misleading number.

Last year, before the bill surfaced, the Treasury Department had proposed a plan to hire about that many IRS employees over the next 10 years if it got the money.

The IRS will release final figures for its hiring plans in the coming months, according to a Treasury Department official. But those employees won’t all be hired at the same time, won’t all be accountants and in many cases will replace employees who are expected to quit or retire, experts and officials say.

The IRS currently has about 80,000 employees ranging from auditors to customer service representatives. According to the IRS, the agency has lost about 50,000 employees over the past five years due to attrition.

Budget cuts, primarily demanded by Republicans, have also reduced the number of law enforcement officers, which has fallen about 30% since 2010, although the number of applicants has increased.

Will the new funding increase exam rates?

Most likely because, in part, that’s the intention of giving the IRS billions in new funding.

The tax gap is estimated at about $400 billion a year — revenue that the US government could, but cannot, collect because taxpayers understate their income or use other tactics to lower their tax burden.

But the risk of being audited is now at a decade-low. According to a May study by the US Government Accountability Office, the audit rate for individual taxpayers was 0.25% in 2019, up from 0.9% in 2010. Audit rates for all income levels declined during this period.

The reason for the decline: A loss of IRS personnel and funds. According to the GAO report, the agency employs about the same number of staff as it did in the mid-1970s. And that could only get worse without more funding, since more than half of the IRS employees who work in enforcement are currently eligible for retirement, said Natasha Sarin, the Treasury Department’s adviser on tax policy and enforcement.

Could middle-class taxpayers be targeted by the IRS?

According to tax experts and officials at the IRS and Treasury Departments, probably not.

Most middle-class workers receive tax-time W-2s, or tax forms, that show total compensation and the amount of federal, state, and other taxes withheld from your paycheck. This data is also reported to the IRS, which then checks that the tax returns match the amount reported by the employer. In other words, it’s difficult for people who receive W-2 to hide their income.

In an Aug. 4 letter to the Senate, IRS Commissioner Charles Rettig noted that “audit rates for households earning less than $400,000 will not increase compared to recent years.”

Who might face higher audit rates?

According to Treasury Department officials, high-earning Americans and corporations.

Other taxpayers may also come under closer scrutiny, including the self-employed and those involved in cash transactions, as these types of workers often find it easier to claim deductions they may not be entitled to or understate income, tax experts say Celebration.

“If you look at it [$80 billion] As an investment, you’re saying, ‘How do we generate the most revenue for the money we’re being allocated?’ and the biggest potential impact is that business owners and higher-income individuals face more scrutiny, Bronnenkant said.

What about the impact on low-income households?

A notable point is that the IRS has recently focused its recent enforcement efforts on two groups: wealthy taxpayers and low-income households.

Households with an annual income of less than 25,000 US dollars are even five times as likely to be tested by the IRS like everyone else, according to an analysis of IRS data by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University.

That’s largely because the IRS is checking whether tax returns claiming the Earned Income Tax Credit (EITC) actually qualify for the benefit, which can net some families a tax credit of up to $7,000. This is a valuable benefit, but one that can be abused, as analysis found that up to half of tax credits were incorrectly overclaimed, or even incorrectly claimed at all.

It’s likely that the IRS will continue to review tax returns claiming this tax credit, but the IRS’s Rettig noted in his letter that the agency’s focus would be on “meaningful, effective investigations by large corporations and wealthy taxpayers to ensure that this is the case pay their fair share.”

— With reports from the Associated Press.

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