Democrats’ new climate, health and tax package — known as the Inflation Reduction Act — includes nearly $80 billion in new funding for the Internal Revenue Service, which aims to help the agency’s chronically underfunded staff support enforcement action collection and amplify unpaid taxes from wealthy Americans.
Funding has become a political flashpoint in recent days among conservatives and some business groups, who have falsely claimed the IRS will use the money to hire one “Army” of 87,000 new agents aimed at the average taxpayer.
Senator Mike Crapo, the top Republican on the Senate Treasury Committee, said the new funds would be used to squeeze “more revenue” from Americans earning less than $400,000 because they are “easy targets.”
House Minority Leader Kevin McCarthy said the money would be used to “harass the middle class”. The National Federation of Independent Business called the enforcement effort an “indirect tax” that would burden small businesses with more audits and scrutiny.
Treasury Department officials say all of these claims are false. Government officials have reiterated that they will focus enforcement efforts on wealthy Americans and large corporations.
The $80 billion in funding for the IRS is a small fraction of the Inflation Reduction Act, which is expected to involve more than $400 billion in spending. It is set to begin to reverse more than a decade of decay and budget cuts at the agency. The IRS’s budget has been cut by nearly 20 percent since 2010, affecting the agency’s ability to increase staff and modernize half-century-old technology. In 2010, the IRS had approximately 94,000 employees. That number dropped to about 78,000 employees in 2021. Some of the agency’s computers still run COBOL, a programming language from the 1960s.
Since 2010, the agency’s enforcement staff has declined 30 percent, according to IRS officials, and audit rates for the wealthiest taxpayers have fallen the most due to years of underfunding. The new bill is an attempt to change that.
What the bill means to most people filing taxes
The new funding aims to help narrow the “tax gap,” or the difference between what people pay in taxes and what they owe in taxes, which the Treasury Department estimates at about $600 billion a year. The new money could help the IRS boost revenue by about $200 billion over the next decade, according to an estimate by the Congressional Budget Office, though the exact amount is difficult to calculate and highly uncertain.
Natasha Sarin, a tax policy and enforcement adviser at the Treasury Department, said the odds of Americans earning less than $400,000 a year are not increasing from typical levels in recent years.
Instead, Sarin said, average taxpayers should have an improved experience filing their taxes because the funds would allow the agency to bolster staffing. In the first half of 2021, fewer than 15,000 staff were available to answer nearly 200 million calls, equivalent to one person for every 13,000 calls, according to the Treasury Department.
“For ordinary taxpayers, for small businesses, and for low-income taxpayers, the only change they’re going to realize is there’s going to be an IRS agent who can answer the phone when they call,” Sarin said.
As a result of downsizing at the IRS, audit rates of individual income tax returns for all income brackets fell from 2010 to 2019, according to a recent Government Accountability Office report. Audit rates fell the most for taxpayers with incomes of $200,000 or more.
In 2019, the audit rate for taxpayers with incomes between $25,000 and $200,000 was 0.17 percent, according to the report. For those earning $5 million or more, the exam rate was 2.35 percent that same year.
A 2018 analysis by ProPublica found that while scrutiny for the wealthy had declined most dramatically, the IRS continued to scrutinize the poorest claimants — recipients of anti-poverty tax credits, including the earned income tax credit — at relatively high rates .
Over the past decade, audit rates for multimillionaires have fallen twice as much as audit rates for the lowest-income families receiving the EITC because it requires more resources to track top earners, Sarin said.
The funding should allow the IRS to better target wealthy earners who don’t pay their taxes because the agency will be able to improve its technology, Sarin said, reducing the likelihood of compliant taxpayers being audited.
Janet Yellen, the Treasury Secretary, reiterated similar commitments in a letter to the IRS Commissioner last week.
“Contrary to misinformation from opponents of this legislation, small businesses or households making $400,000 a year or less will not see an increase in their chances of being audited,” Yellen wrote.
Bill Hoagland, senior vice president at the Bipartisan Policy Center, who focuses on economic policy, said improving these aspects would help average earners file their taxes more efficiently because they could more easily get information to fill out their tax forms.
Budget cuts and reduced capacity have resulted in a significant backlog of unprocessed tax forms. As of early August, the IRS had a backlog of 9.7 million unprocessed individual returns for 2021.
“In short, the average American shouldn’t be threatened, but should be grateful that they’re pouring money into taxpayer services that have shrunk tremendously,” Hoagland said.
Janet Holtzblatt, a senior fellow at the Tax Policy Center, generally said she believes the IRS is committed to maintaining its goal of focusing enforcement efforts on wealthy Americans and large corporations. But she said that depends in part on the IRS’s ability to determine people’s “actual” incomes.
“The types of taxpayers that fall into this category, where there might be some uncertainty, will be self-employed, there will be partners, there will be people who have income that is not subject to a W-2,” Holtzblatt said . “It’s more difficult to identify those whose incomes are not independently reported.”
Sarin said the IRS will focus on hiring employees who have experience working with complex tax returns for large corporations and high net worth individuals. Audits by average taxpayers follow a significantly different process, she said.
Will the IRS really hire 87,000 auditors?
Of the nearly $80 billion for the IRS in the bill, more than half, or about $46 billion, will be used to improve enforcement efforts.
The IRS has not yet released estimates of how many new employees the agency could hire with the new funding in the Inflation Reduction Act. The agency is expected to release the final numbers and breakdown in the coming months.
The figure of 87,000 appears to come from a Treasury Department report released in May 2021 that detailed the impact of tax compliance measures in the Biden administration’s American Families Plan proposal. The report estimates that the IRS could hire 86,852 employees by 2031 with nearly $80 billion in additional funding.
But Sarin said the new funds would also be used to hire other types of staff, like customer service reps and IT specialists, and not just new accountants.
She also said many of the new hires would fill positions left open by staff expected to leave the agency over the next decade. At least 50,000 of the agency’s current employees are expected to leave over the next five years as they become eligible for retirement, Sarin said.
Douglas Holtz-Eakin, the president of the conservative American Action Forum and former director of the Congressional Budget Office, said the additional funding did not guarantee the agency would be able to significantly reduce the tax gap because wealthy people usually have lawyers who do this can work out the examination process. But the new funding would still help reverse the agency’s decline, he said.
“The workforce is down about 20 percent,” Holtz-Eakin said. “So anything that reverses must be seen as very significant.”