Treasury Secretary Janet Yellen has ordered the Internal Revenue Service (IRS) not to send tax enforcers to audit households making less than $400,000 per year after concerns were raised that a massive funding boost to the agency would be used to crack down not on wealthy tax dodgers but to bully middle-income Americans.
The Inflation Reduction Act, which recently cleared the Senate in a partisan vote and is expected to be approved by the House as soon as Friday, allocates some $80 billion in additional funding for the IRS, with a portion earmarked for increased enforcement such as audits.
Yellen said in an Aug. 10 letter to IRS Commissioner Charles Rettig that the “much-needed” funding would be used to modernize outdated technological infrastructure, improve taxpayer service, and enforce tax laws against high-earners and big corporations that don’t pay what they owe in taxes.
She vowed that audit rates wouldn’t increase for households making less than $400,000 per year.
“Specifically, I direct that any additional resources—including any new personnel or auditors that are hired—shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels,” Yellen said.
“This means that, contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited,” she added.
Audits Targeting Middle-Income Americans?
Republicans have speculated that the money would be used to hire tens of thousands of IRS agents while arguing that their enforcement efforts would target ordinary Americans.
“Democrats in Washington plan to hire an army of 87,000 IRS agents so they can audit more Americans like you. That’s more than the entire population of [President] Joe Biden’s hometown of Scranton,” House Minority Leader Rep. Kevin McCarthy (R-Calif.) said in a statement.
A Treasury Department report from May 2021 (pdf) estimated that an investment roughly the size of the one in the Inflation Reduction Act would enable the IRS to hire around 87,000 employees in a range of posts by 2031.
And while the bill itself makes no mention of hiring targets, the 87,000 figure was also cited by Grover Norquist, president of the Americans for Tax Reform, in a recent interview on Fox News.
“They want to take $80 billion from taxpayers, $80 billion and hire 87,000 more bureaucrats in the IRS. They’re going after small businesses. The IRS itself says they’re going to dramatically increase how they go after independent contractors and small businesses, not General Motors, smaller businesses. That’s where they think they’re going to make their money,” he told the outlet.
But Treasury Department officials told Time in a recent interview that the funds would cover hiring for a wide range of positions, including IT technicians and taxpayer support staff, as well as specialized auditors who would focus on tax evasion by corporations and high-income earners.
“It is wholly inaccurate to describe any of these resources as being about increasing audit scrutiny of the middle class or small businesses,” Natasha Sarin, a counselor for tax policy and implementation at the Treasury Department, told the outlet.
‘Play By the Rules’
The IRS chief, too, has insisted that the tax agency would “absolutely not” be increasing audit scrutiny on small businesses or middle-income Americans but that the extra funds would “get us back to historical norms in areas of challenge for the agency,” such as large corporate and high-net-worth taxpayers with tax issues, according to a letter to members of the Senate on Aug. 4 (pdf).
Those issues, Rettig said, would require “sophisticated, specialized teams in place that are able to unpack complex structures and identify noncompliance.”
“These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans,” Rettig added. “As we’ve been planning, our investment of these enforcement resources is designed around the Department of the Treasury’s directive that audit rates will not rise relative to recent years for households making under $400,000.”
Democrats have argued that the funding is needed to crack down on wealthy tax dodgers.
“Without these new investments, those at the top will be able to get away with more and more tax avoidance. That’s not fair to the tens of millions of honest, hardworking taxpayers who play by the rules,” lawmakers said.
Democrats have pointed to a May report from the Government Accountability Office showing that IRS audits have dropped sharply over the past decade.
The IRS has blamed the declining audit rates on staffing issues and the lack of experts needed to handle complex higher-income audits.
‘IRS Funding Bloat’
Some critics of the IRS funding boost insist a big part of the new money will be used to target middle-class Americans.
“My colleagues claim this massive funding boost will allow the IRS to go after millionaires, billionaires, and so-called rich ‘tax cheats,’ but the reality is a significant portion raised from their IRS funding bloat would come from taxpayers with income below $400,000,” Sen. Mike Crapo (R-Idaho) said in an Aug. 7 statement.
The Congressional Budget Office estimates that the funding boost to the IRS is expected to bring in $203.7 billion in revenue from 2022 to 2031.
Katabella Roberts contributed to this report.