The IRS is set to receive billions for enforcing audits. Here’s what it means for taxpayers – CNN | Vette Leader

The Democrats’ Inflation Reduction Act calls for nearly $80 billion to be made available to the IRS over 10 years. After months of negotiations over the sweeping spending package, the Senate passed the bill earlier this month and sent the bill to the House of Representatives for a vote before it reaches President Joe Biden’s desk.
IRS Commissioner Charles Rettig, along with his predecessor, has asked Congress for additional funding. The agency’s budget has shrunk by more than 15% over the past decade. As a result, the number of employees and the number of audits have been declining for years.
However, some Republicans are attacking the proposed increase in IRS funding, arguing that it would leave more middle-class Americans and small businesses with headaches facing a tax audit.

Democrats and Rettig – who was appointed by former President Donald Trump – have repeatedly said the intention is not to attack the middle class but to focus on making sure wealthy tax dodgers comply with the law. How the money is used is ultimately up to the IRS.

“For too long, the IRS has been unable to conduct meaningful and effective investigations of large corporations and wealthy taxpayers to ensure they are paying their fair share,” Rettig wrote in a letter to lawmakers last week.

“The goal shouldn’t just be to increase audits, but to improve audit productivity. You want the IRS to single out the companies and individuals for audits that were genuinely non-compliant,” said Janet Holtzblatt, Senior Fellow at Urban-Brookings Tax Policy Center.

Here’s what it could mean for taxpayers if the IRS receives an increase in funding:

How much funding will the IRS receive?

The Anti-Inflation Act would provide the IRS with nearly $80 billion over 10 years, in addition to the money the agency normally receives annually from Congress. The IRS received nearly $12.6 billion for fiscal 2022.

The new funding would result in an inflation-adjusted increase in IRS funding of more than 50%, Holtzblatt said.

The $80 billion would be spread across four different areas of the IRS over the next ten years.

More than half, about $45.6 billion, would go toward strengthening enforcement efforts — including collecting taxes owed, providing legal assistance, conducting criminal investigations and monitoring digital assets, according to the law.

More than $25 billion would be allocated to support IRS operations, including expenses such as rent payments, printing, postage and telecommunications.

Nearly $4.8 billion would be used to modernize the agency’s customer service technology, such as developing a callback service.

Approximately $3 billion would be allocated for taxpayer support, filing and account services.

How many new accountants could be hired?

The Republican National Committee and several Republican lawmakers have criticized the new IRS funding, claiming it will provide the agency with an “army of 87,000 new IRS agents.”
But this number is misleading. The Treasury Department estimated in 2021 that an investment of nearly $80 billion in the IRS could allow the agency to hire 86,852 full-time employees over the course of a decade. But that number applies to all workers, not just law enforcement officers.
Still, hiring more than 86,000 employees over a 10-year period could be a huge boost for the IRS, which currently has nearly 80,000 employees. But the number of IRS employees has declined over the past decade and currently stands at 1970s and agency levels It is expected that people will continue to be lost.
Earlier this year, Rettig told lawmakers that the IRS would need to hire 52,000 employees over the next six years just to maintain current staff levels and replace those who are retiring or otherwise leaving.

The Anti-Inflation Act does not direct the IRS to hire a specific number of law enforcement officers, and the agency would have to decide on staffing plans.

“The resources to modernize the IRS will be used for much-needed improvements in taxpayer services — from answering phone calls to improving 1960s IT systems — and to crack down on wealthy tax evaders and corporate tax evaders who are costing the American people hundreds of billions of dollars dollars a year,” said Natasha Sarin, Treasury Department adviser on tax policy and implementation, in a statement sent to CNN.

“The bulk of the new hires will replace the usual level of attrition over the next few years,” she added.

How Much More in Federal Taxes Could the IRS Collect?

With an increase in enforcement resources, the IRS will be able to conduct more audits and, as a result, collect more federal tax revenue.

The Congressional Budget Office expects the increased collection to total approximately $203 billion over 10 years, adding more than $124 billion to federal net revenue over that period when the nearly $80 billion dollars that would be spent.

Stricter enforcement aims to close the so-called “tax gap,” or the difference between the amount of tax revenue the government collects and what taxpayers actually owe. There are some bad actors trying to avoid paying their debts to Uncle Sam, but some unintentional mistakes made by taxpayers are also widening the tax gap.

A legacy IRS estimate based on tax years 2011, 2012, and 2013 found that nearly 84% of federal taxes are paid voluntarily and on time, ultimately leaving about $381 billion uncollected. Rettig has told lawmakers in the past he believes the tax gap could now be as high as $1 trillion a year.
According to the Government Accountability Office, audit rates of individual income tax returns for all income brackets decreased between tax years 2010 through 2019 because headcount and funding also decreased. On average, individual tax returns were audited more than three times more frequently in tax year 2010 than in tax year 2019.

Who is more likely to face an IRS audit?

Selection for an exam does not always indicate a problem, according to the IRS. Sometimes returns are randomly selected.

The Biden administration has repeatedly said it wants the IRS to focus increased enforcement action on wealthy taxpayers and large corporations, rather than targeting households earning less than $400,000 a year.

In his letter to lawmakers last week, Rettig wrote “that audit rates for households earning less than $400,000 will not increase compared to recent years.”

He also said better technology and customer service would make it less likely that compliant taxpayers would be audited.

Yellen directs the IRS not to use new funds to increase the chances of auditing Americans earning less than $400,000

This week Treasury Secretary Janet Yellen publicly reiterated Rettig’s statement, noting that the new enforcement resources will instead focus “on high-end violations.”

Lawmakers also included language in the bill intended to clarify who is the focus of a ramp-up of audits.

The bill states that the new investment in the IRS “is not intended to increase taxes for taxpayers or small businesses with taxable income less than $400,000.”

Still, there is some uncertainty as to exactly how the IRS will decide how to strengthen audits.

“This will clearly be something that Congress and other interested parties will try to oversee — but good luck,” Holtzblatt said.

“I think it’s going to be a difficult commitment to see if it’s kept,” she added.

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