The IRS is set to get billions for audit enforcement. Here’s what it means for taxpayers
By Katie Lobosco, CNN
The Internal Revenue Service is finally about to get the additional funding its officials have long been waiting for.
The Democrats’ Inflation Reduction Act calls for delivering nearly $80 billion to the IRS over 10 years. After months of negotiations over the sweeping spending package, the Senate passed the bill earlier this month, sending the legislation to the House for a vote before it reaches President Joe Biden’s desk.
The funding would help support the work of the IRS — including but not limited to audits — and in turn, is expected to bring in more federal tax revenue to help offset the cost of the Democrats’ plan to lower prescription drug costs and combat climate change.
IRS Commissioner Charles Rettig, along with his predecessor, have asked Congress for additional funding. The agency’s budget has shrunk by more than 15% over the last decade. As a result, staffing levels and audit rates have been declining for years.
The agency’s struggles became even more apparent to taxpayers during the Covid-19 pandemic when it could not keep up with filings. The IRS is still playing catch-up, having started the year with a backlog of 11 million unprocessed tax returns.
But some Republicans are attacking the proposed increase in IRS funding, arguing that it would leave more middle-class Americans and small businesses with the headache of facing a tax audit.
Democrats have said repeatedly that the intent is not to target the middle class but instead focus on making sure wealthy tax cheats comply with the law. It’s ultimately up to the IRS how the money is used.
“The goal should not only be to increase audits, but improve the productivity of audits. You want the IRS to select the businesses and people for audits who really have not been compliant,” said Janet Holtzblatt, senior fellow at the Urban-Brookings Tax Policy Center.
Here’s what it could mean to taxpayers if the IRS gets an increase in funding:
How much funding will the IRS receive?
The Inflation Reduction Act would provide nearly $80 billion to the IRS over 10 years, in addition to the money the agency normally receives from Congress on an annual basis. The IRS received nearly $12.6 billion for fiscal year 2022.
The new funding would result in a more than 50% increase in IRS funding adjusted for inflation, Holtzblatt said.
The $80 billion would be spread across four different areas of the IRS over the next decade.
More than half, about $45.6 billion, would go toward strengthening enforcement activities — including collecting taxes owed, providing legal support, conducting criminal investigations and providing digital asset monitoring, according to the bill text.
More than $25 billion would be allocated to support IRS operations, including expenses like rent payments, printing, postage and telecommunications.
Nearly $4.8 billion would be used for modernizing the agency’s customer service technology, like developing a callback service.
Roughly $3 billion would be allocated for taxpayer assistance, filing and account services.
How many new auditors could be hired?
The Republican National Committee and several Republican lawmakers have criticized the new IRS funding, claiming that it will provide the agency with an “army of 87,000 new IRS agents.”
But that number is misleading. The Treasury Department did estimate in 2021 that a nearly $80 billion investment in the IRS could allow the agency to hire 86,852 full-time employees over the course of a decade. But that figure accounts for all workers, not solely enforcement agents.
Still, hiring more than 86,000 workers over 10 years could be a huge increase for the IRS, which currently has nearly 80,000 employees. But the number of IRS staff has declined over the past decade, currently standing at 1970s levels, and the agency is expected to keep losing people.
Earlier this year, Rettig told lawmakers that the IRS would need to hire 52,000 people over the next six years just to maintain current staffing levels to replace those who retire or otherwise leave.
The Inflation Reduction Act does not instruct the IRS to hire a certain number of enforcement agents, and the agency would need to decide on staffing plans.
“The resources to modernize the IRS will be used for sorely needed improvements to taxpayer services — from answering the phones to improving 1960s-era IT systems — and to crack down on wealthy and corporate tax evaders who cost the American people hundreds of billions of dollars each year,” Natasha Sarin, Treasury Department counselor for tax policy and implementation, said in a statement sent to CNN.
“The majority of new employees will replace the standard level of staff departures over the next few years,” she added.
How much more would the IRS be able to collect in federal taxes?
With an increase in funding for enforcement activities, the IRS will be able to conduct more audits and, as a result, collect more federal tax revenue.
The Congressional Budget Office expects increased collection to amount to roughly $203 billion over 10 years, raising net federal revenue by more than $124 billion during that time period when accounting for the nearly $80 billion that would be spent.
Tougher enforcement is intended to close what’s known as the “tax gap,” or the difference between the amount of tax revenue the government is collecting and what taxpayers actually owe. There are some bad actors that try to evade paying what they owe to Uncle Sam, but some inadvertent errors made by taxpayers drive the tax gap, too.
An older IRS estimate, based on tax years 2011, 2012 and 2013, found that nearly 84% of federal taxes are paid voluntarily and on time, leaving about $381 billion ultimately uncollected. Rettig has told lawmakers in the past that he believes the tax gap could be as much as $1 trillion a year now.
Audit rates of individual income tax returns decreased for all income levels between tax years 2010 to 2019 as staff levels and funding also declined, according to the Government Accountability Office. On average, individual tax returns were audited over three times more often during tax year 2010 than in tax year 2019.
Who may be more likely to face an IRS audit?
Selection for an audit doesn’t always suggest there’s a problem, according to the IRS. Sometimes returns are selected at random.
The Biden administration has repeatedly said that it wants the IRS to focus increased enforcement activity on high-wealth taxpayers and large corporations and not target households that earn less than $400,000 a year.
Rettig, who was appointed to helm the IRS by former President Donald Trump, wrote in a letter sent to lawmakers last week, “that audit rates will not rise relative to recent years for households making under $400,000.”
He also said that better technology and customer service would make it less likely that compliant taxpayers would be audited.
This week, Treasury Secretary Janet Yellen publicly reiterated Rettig’s statement, noting that the new enforcement resources will instead “focus on high-end noncompliance.”
Lawmakers also included language in the bill that aims to clarify who is the focus of a ramp-up in audits.
The bill says that the new investment in the IRS is not “intended to increase taxes on any taxpayer or small business with a taxable income below $400,000.”
Still, there is some uncertainty about how exactly the IRS will decide how to ramp up audits.
“Clearly this is going to be something that Congress and other interested parties are going to try and monitor — but good luck,” Holtzblatt said.
“I think it’s going to be a difficult commitment to observe whether it’s being followed,” she added.
Senate deal should make it easier to buy electric vehicles
AP file
Launching a long-sought goal, the bill would allow the Medicare program to negotiate prescription drug prices with pharmaceutical companies, saving the federal government some $288 billion over the 10-year budget window.
Those new revenues would be put back into lower costs for seniors on medications, including a $2,000 out-of-pocket cap for older adults buying prescriptions from pharmacies.
Money would also be used to provide free vaccinations for seniors, who now are among the few not guaranteed free access, according to a summary document.
AP file
Launching a long-sought goal, the bill would allow the Medicare program to negotiate prescription drug prices with pharmaceutical companies, saving the federal government some $288 billion over the 10-year budget window.
Those new revenues would be put back into lower costs for seniors on medications, including a $2,000 out-of-pocket cap for older adults buying prescriptions from pharmacies.
Money would also be used to provide free vaccinations for seniors, who now are among the few not guaranteed free access, according to a summary document.
Senate deal should make it easier to buy electric vehicles
AP file
The bill would extend the subsidies provided during the COVID-19 pandemic to help some Americans who buy health insurance on their own.
Under earlier pandemic relief, the extra help was set to expire this year. But the bill would allow the assistance to keep going for three more years, lowering insurance premiums for people who are purchasing their own health care policies.
AP file
The bill would extend the subsidies provided during the COVID-19 pandemic to help some Americans who buy health insurance on their own.
Under earlier pandemic relief, the extra help was set to expire this year. But the bill would allow the assistance to keep going for three more years, lowering insurance premiums for people who are purchasing their own health care policies.
Senate deal should make it easier to buy electric vehicles
AP file
The bill would invest $369 billion over the decade in climate change-fighting strategies including investments in renewable energy production and tax rebates for consumers to buy new or used electric vehicles.
It's broken down to include $60 billion for a clean energy manufacturing tax credit and $30 billion for a production tax credit for wind and solar, seen as ways to boost and support the industries that can help curb the country's dependence on fossil fuels.
For consumers, there are tax breaks as incentives to go green. One is a 10-year consumer tax credit for renewable energy investments in wind and solar. There are tax breaks for buying electric vehicles, including a $4,000 tax credit for purchase of used electric vehicles and $7,500 for new ones.
In all, Democrats believe the strategy could put the country on a path to cut greenhouse gas emissions 40% by 2030, and "would represent the single biggest climate investment in U.S. history, by far."
AP file
The bill would invest $369 billion over the decade in climate change-fighting strategies including investments in renewable energy production and tax rebates for consumers to buy new or used electric vehicles.
It's broken down to include $60 billion for a clean energy manufacturing tax credit and $30 billion for a production tax credit for wind and solar, seen as ways to boost and support the industries that can help curb the country's dependence on fossil fuels.
For consumers, there are tax breaks as incentives to go green. One is a 10-year consumer tax credit for renewable energy investments in wind and solar. There are tax breaks for buying electric vehicles, including a $4,000 tax credit for purchase of used electric vehicles and $7,500 for new ones.
In all, Democrats believe the strategy could put the country on a path to cut greenhouse gas emissions 40% by 2030, and "would represent the single biggest climate investment in U.S. history, by far."
Senate deal should make it easier to buy electric vehicles
AP file
The biggest revenue-raiser in the bill is a new 15% minimum tax on corporations that earn more than $1 billion in annual profits.
It's a way to clamp down on some 200 U.S. companies that avoid paying the standard 21% corporate tax rate, including some that end up paying no taxes at all.
The new corporate minimum tax would kick in after the 2022 tax year and raise some $313 billion over the decade.
Money is also raised by boosting the IRS to go after tax cheats. The bill proposes an $80 billion investment in taxpayer services, enforcement and modernization, which is projected to raise $203 billion in new revenue — a net gain of $124 billion over the decade.
The bill sticks with Biden's original pledge not to raise taxes on families or businesses making less than $400,000 a year.
The lower drug prices for seniors are paid for with savings from Medicare's negotiations with the drug companies.
AP file
The biggest revenue-raiser in the bill is a new 15% minimum tax on corporations that earn more than $1 billion in annual profits.
It's a way to clamp down on some 200 U.S. companies that avoid paying the standard 21% corporate tax rate, including some that end up paying no taxes at all.
The new corporate minimum tax would kick in after the 2022 tax year and raise some $313 billion over the decade.
Money is also raised by boosting the IRS to go after tax cheats. The bill proposes an $80 billion investment in taxpayer services, enforcement and modernization, which is projected to raise $203 billion in new revenue — a net gain of $124 billion over the decade.
The bill sticks with Biden's original pledge not to raise taxes on families or businesses making less than $400,000 a year.
The lower drug prices for seniors are paid for with savings from Medicare's negotiations with the drug companies.
Senate deal should make it easier to buy electric vehicles
AP file
With $739 billion in new revenue and some $433 billion in new investments, the bill promises to put the difference toward deficit reduction.
Federal deficits have spiked during the COVID-19 pandemic when federal spending soared and tax revenues fell as the nation's economy churned through shutdowns, closed offices and other massive changes.
The nation has seen deficits rise and fall in recent years. But overall federal budgeting is on an unsustainable path, according to the Congressional Budget Office, which put out a new report this week on long-term projections.
AP file
With $739 billion in new revenue and some $433 billion in new investments, the bill promises to put the difference toward deficit reduction.
Federal deficits have spiked during the COVID-19 pandemic when federal spending soared and tax revenues fell as the nation's economy churned through shutdowns, closed offices and other massive changes.
The nation has seen deficits rise and fall in recent years. But overall federal budgeting is on an unsustainable path, according to the Congressional Budget Office, which put out a new report this week on long-term projections.
Senate deal should make it easier to buy electric vehicles
AP file
This latest package after 18 months of start-stop negotiations leaves behind many of Biden's more ambitious goals.
While Congress did pass a $1 trillion bipartisan infrastructure bill of highway, broadband and other investments that Biden signed into law last year, the president's and the party's other priorities have slipped away.
Among them, a continuation of a $300 monthly child tax credit that was sending money directly to families during the pandemic and is believed to have widely reduced child poverty.
Also gone, for now, are plans for free pre-kindergarten and free community college, as well as the nation's first paid family leave program that would have provided up to $4,000 a month for births, deaths and other pivotal needs.
Associated Press writer Matthew Daly contributed to this report.
AP file
This latest package after 18 months of start-stop negotiations leaves behind many of Biden's more ambitious goals.
While Congress did pass a $1 trillion bipartisan infrastructure bill of highway, broadband and other investments that Biden signed into law last year, the president's and the party's other priorities have slipped away.
Among them, a continuation of a $300 monthly child tax credit that was sending money directly to families during the pandemic and is believed to have widely reduced child poverty.
Also gone, for now, are plans for free pre-kindergarten and free community college, as well as the nation's first paid family leave program that would have provided up to $4,000 a month for births, deaths and other pivotal needs.
Associated Press writer Matthew Daly contributed to this report.
The IRS is set to get billions for audit enforcement. Here’s what it means for taxpayers
Zach Gibson/Getty Images
The Democrats' Inflation Reduction Act calls for delivering nearly $80 billion to the IRS over 10 years. The IRS building is pictured here in April 2019.
Zach Gibson/Getty Images
The Democrats' Inflation Reduction Act calls for delivering nearly $80 billion to the IRS over 10 years. The IRS building is pictured here in April 2019.
