Stefani Reynolds/AFP via Getty Images
The IRS is about to make a big cash injection.
As part of the massive climate and health bill passed by the House of Representatives on Friday, the tax collection agency is set to get $80 billion over the next decade.
Some of that money is used to upgrade decades-old computer systems at the Internal Revenue Service (IRS). And some are designed to improve customer service, including a taxpayer phone line that leaves nine calls out of ten unanswered.
Most of the money, however, is earmarked for increased enforcement — to help the IRS collect more of the estimated $600 billion in taxes that go unpaid each year, much of which is owed by rich people who don’t have adequate incomes specify.
“By strengthening the IRS’s capacity to prosecute wealthy tax dodgers, you will be able to collect at least $400 billion from that over the next decade, and I suspect a lot more,” said Natasha Sarin, a tax policy and enforcement officer at the Ministry of Finance.
But there is fierce opposition from Republicans. The IRS funding passed Congress along strict party lines, as did the rest of the Inflation Reduction Act.
“Imagine IRS agents descending on America like a swarm of locusts,” warned Sen. Ted Cruz, R-Texas, in an interview with Fox Business. “And by the way, these IRS agents aren’t there to hunt down billionaires. They are there to take care of you. They are there to take care of your small business. You are there to take care of your family.”
Both Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig – who was appointed by former President Trump – insist the extra enforcement effort will target the wealthy, not the middle-class, taxpayers.
“Let’s be very clear about what these resources do and don’t do,” Sarin said. “These resources do not collect audits for small businesses or households making less than $400,000 per year.”
The IRS lacked funds
The new money will help reverse more than a decade of IRS underfunding. Law enforcement ranks have shrunk by 30% since 2010.
As experienced auditors have left, the IRS has increasingly focused on simpler audits that involve lower-income families — though they account for a small portion of unpaid taxes.
Syracuse University researchers found that 46% of IRS audits in the last fiscal year targeted people receiving the Earned Income Tax Credit — a tax break designed to supplement the incomes of low-wage earners.
Kevin Dietsch/Getty Images
Individuals receiving the tax credit were audited more than three times as often as taxpayers as a whole, despite accounting for a small fraction of unpaid taxes.
“These are easy grades,” says Susan Long, who, as a co-founder of TRAC, a nonprofit research center in Syracuse, has overseen IRS audits for decades. “Enforcement levels have really gone down, except for this poor, lowest-income group where you can just send a letter in the mail.”
Millionaires have largely avoided tax audits
At the same time, Long said the IRS reviewed just 2.2% of millionaires’ tax returns last year — a sharp decrease from 2015.
“Most millionaires don’t even look at their returns, even though all the studies show that’s where the money is,” Long said.
The vast majority of average earners are already paying the taxes they owe. They don’t have much of a choice since their income is reported directly to the IRS.
Wealthy people have more opportunities to avoid taxes. Their sources of income are often less transparent. And they can hire lawyers and accountants to evade the IRS, which often falls short.
“It’s been a David versus Goliath battle for far too long,” Sarin said. “We are finally giving the IRS the tools it needs to do meaningful policing [tax] Dodge at the top of the [income] Distribution.”
Sarin argued that increased enforcement will not only allow the IRS to collect more money for the government, but will ensure a fairer tax system.
“It’s about to end a two-tier tax system in which certain taxpayers have the option to opt-out and other taxpayers meet their obligations and comply voluntarily — that is the vast majority of taxpayers,” she said.