Lawmakers trade accusations over IRS hiring of auditors

Accounting

The Inflation Reduction Act includes an extra $80 billion in funding for the Internal Revenue Service over the next 10 years, and Republicans and Democrats have been sparring over whether those funds will be used to audit low-income and middle-class taxpayers.

Treasury Secretary Janet Yellen sent a letter Wednesday to IRS Commissioner Charles Rettig calling on him not to use the funds for auditing taxpayers who earn under $400,000 per year. Instead she wants the IRS to use the extra money to improve taxpayer service, modernize outdated technological infrastructure, and increase equity in the tax system by enforcing the tax laws against high-earners, large corporations and complex partnerships who don’t pay what they owe.

“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 wrote. “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.”

Rettig sent a letter of his own last week saying the money wouldn’t be used for audits of taxpayers who earn less than $400,000. “These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans,” he wrote. “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. Other resources will be invested in employees and IT systems that will allow us to better serve all taxpayers, including small businesses and middle-income taxpayers. Enhanced IT systems and taxpayer service will actually mean that honest taxpayers will be better able to comply with the tax laws, resulting in a lower likelihood of being audited and a reduced burden on them.”

A man walks past the IRS headquarters in Washington, D.C.
The IRS headquarters in Washington, D.C.

Andrew Harrer/Bloomberg

However, he defended the ability to use the funding for audits of corporations and high-income taxpayers. “Large corporate and high-net-worth taxpayers often engage teams of sophisticated representatives who pursue unsettled or sometimes questionable interpretations of tax law,” said Rettig. “The integrity and fairness of our tax administrative system relies upon the ability of our agency to maintain a strong, visible, robust enforcement presence directed to these and other similarly situated taxpayers when they are noncompliant. These important efforts also support honest taxpayers who voluntarily comply with their filing and reporting requirements.”

Republicans contend the bill would nevertheless lead to more audits of low-income taxpayers. “It’s clear that the President, the IRS and the Secretary of Treasury are scrambling to protest that they are not going to increase audits on people making less than $400,000,” said Sen. Mike Crapo, R-Idaho, the ranking Republican on the Senate Finance Committee, in a statement Friday. “However, when given the opportunity to vote on the Senate floor and put into binding statute that increased funds could not be used to increase audits on those making less than $400,000 per year, every single Democratic senator voted no.  When I offered my amendment to simply make it clear that the $80 billion being given to the IRS — six times its current annual budget — could not be utilized to audit people making less than $400,000, the most they would agree to was to say they did not ‘intend’ to audit them.  That’s because they know from the analysis of the Joint Committee on Taxation that most underreported income occurs among taxpayers earning less than $200,000 per year, and from the Congressional Budget Office that they cannot collect the $200 billion they are claiming without auditing people making less than $400,000. If they truly do not intend to audit anyone making less than $400,000, then they would have supported my amendment, turning ‘intent’ into binding statute.”

As lawmakers in the House debated the package Friday, House Minority Whip Steve Scalise, R-Louisiana, also pointed to the Congressional Budget Office report, which had been released that morning.

“There’s going to be an army of 87,000 IRS agents going after lower-income people,” he said on the floor of the House. “And in fact, the smoking gun came out this morning. They don’t have a full CBO report on this bill. You heard the old adage: You’ve got to pass the bill to find out what’s in it. That’s what they’re doing today. That’s why they’re rushing this bill through today. It doesn’t even have a review from the Congressional Budget Office. But just a few hours ago, we got this: a confirmation that the IRS agents will be getting about $20 billion in new taxes from the people making less than $400,000. That’s right, the CBO just confirmed it a few hours ago. So President Biden, who made that promise multiple times — that if you make under $400,000, don’t worry, your taxes don’t go up — this bill breaks President Biden’s promise. It’s confirmed by the CBO, and there was an amendment to stop it from happening, and every Democrat voted against it.”

Democrats and fact checkers have pointed out that the 87,000 IRS agents figure is misleading. It was based on a 2021 Treasury Department report estimating that $78 billion in funding would enable the IRS to hire approximately 87,000 employees by 2031, but most of those jobs wouldn’t be IRS agents and auditors. Much of the funding would instead go for employees who could help with taxpayer service and technology upgrades, while many of them would just be replacing retiring employees.

The Committee for a Responsible Federal Budget pointed out that of the $80 billion in additional IRS funding, $46 billion would be used for enforcement, $25 billion for operations support, $5 billion for business systems modernization, and $3 billion to improve taxpayer services, with the remaining funding going toward administrative support to supplement annual IRS appropriations.

However, Republicans have contended that the IRS will be targeting middle-class “Walmart shoppers.” 

“Yesterday, House Democrats insisted there are no new IRS agents funded in this bill,” said Kevin Brady, R-Texas, the ranking Republican on the House Ways and Means Committee, during the debate Friday. “Read their lips: ‘No new IRS agents.’ They say it’s all fear mongering and they’re just hiring replacements. Unfortunately, the fact is the IRS budget already budgets for those who are leaving through attrition, and the Treasury Department itself outlines the next decade of adding 87,000 new IRS agents. That’s what this bill unleashes. The Congressional Budget Office reports ‘audit rates will increase for every income level,’ that ‘almost 90% of unreported tax income comes from middle-class taxpayers.’ How will Democrats collect $200 billion in more taxes? With thousands of new agents targeting what I would call Walmart shoppers. You know them: they’re real hard-working American families. They are my constituents, they are my neighbors in my district. They’re living paycheck to paycheck, struggling with inflation and high gas prices. They will be hit with over 700,000 new audits thanks to a skyrocketing surge in IRS agents. Maybe that’s why Democrats blocked any language in the Senate that protects Walmart shoppers and other value-shopping families against these new IRS audits.” 

Given threats of violence this week against government officials sparked by the FBI search Monday of former President Donald Trump’s Mar-a-Lago estate in Palm Beach, Florida, leading to an attack by a gunman Thursday on an FBI field office in Cincinnati, some Democrats urged restraint. 

“The incendiary conspiracy theories Republicans are pushing about armed IRS agents are increasingly dangerous and out of control,” said Senate Finance Committee chair Ron Wyden, D-Oregon, in a statement Friday. “High-ranking Republicans, including the former chair of the Finance Committee, are saying shockingly irresponsible things. Given the social media chatter we’re already seeing, it’s all too easy to imagine individuals using these conspiracy theories as justification for violence against public servants and their families. It’s unbelievable that we even need to say this, but there are not going to be 87,000 armed IRS agents going door-to-door with assault weapons. This is funding for answering phone calls and upgrading computer systems. I would hope that House Republicans act responsibly today as the House considers the Inflation Reduction Act.”

The IRS has come under pressure in Congress to lower its audit rate for low-income taxpayers, many of whom face automatic letters from the IRS’s computer systems when there is a mismatch between the numbers they report on their 1040 tax returns and the information returns such as the W-2 forms submitted by their employees. A report released in March by Syracuse University’s Transactional Records Access Clearinghouse, or TRAC, found that low-income workers earning less than $25,000 in total gross receipts were being audited at a rate five times higher than everybody else in fiscal year 2021 (see story). In response to complaints, the IRS released data showing it has begun to boost its audit rates for the wealthy, with audit rates for the $1 million to $5 million category more than doubling to 1.3% this year, and of taxpayers earning more than $10 million quadrupling to 8% (see story). 

Tax professionals have nevertheless seen a downturn in IRS audits over the years. “One of the concerns that a lot of people are talking about is that this is going to increase audits on everybody all the way down to the little guy,” said Kevin Matthews, a CPA and accounting professor at George Mason University’s School of Business who also has his own tax practice. “What they’re not understanding is that there are three different types of audits. You have correspondence audits, office audits and field audits. The majority of correspondence audits are basically, hey, your W-2 said $240,000. You put $230,000. Where was the extra $10,000? That is considered an ‘audit.’ But in reality, that’s just matching. They’re probably going to be doing more office examinations and field examinations.”

He doubts the agency will use the extra funding to pursue small disparities on correspondence audits with low-income taxpayers. 

“One thing that we’re noticing in our practice is that office examinations have pretty much ground to a halt,” said Matthews. “In fact, I’ve only had one in the past six years, which is unusual. And we’ve had no field examinations. Usually there are going to be bigger firms that are going to be dealing with that anyway.”

Matthews believes the funding will be needed to improve customer service for taxpayers as well as professionals. “Customer service has been bad at the IRS for years,” he said. “Part of that is because Congress has been starving them of money.”

He has sometimes spent hours on the phone trying to reach the IRS and believes that companies that offer to wait in line on hold for tax professionals can be overly expensive. 

“It took me around three to four hours to get in, and I got to talking to an IRS agent,” said Matthews. “The first thing I said was, ‘Look, I’m not trying to butter you up, but I know you guys are going through a lot because of COVID. We really appreciate what you’re doing. I know that you’re doing government service and it’s a tough thing. I used to be in the Navy. I used to serve my country.’ These guys are doing the exact same thing. They’re serving their country. I said, ‘I just want to thank you for your service.’ The person broke down on the phone and cried. They are going through such stress.”

The head of the National Treasury Employees Union, which represents IRS employees, disputed claims that the additional IRS funding will build an army of agents to target law-abiding taxpayers.  

“The fact is that the IRS needs to hire across the board,” said NTEU national president Tony Reardon in a statement after the House passed the bill on a party line vote of 220-207 Friday afternoon. “That includes employees to process tax returns, experts in technology, human resource professionals and others who support the mission of the agency. Additionally, the agency expects to lose 52,000 employees in the next six years to attrition and retirements and this funding will help replace departing workers. I urge all Americans to remember that IRS employees are public servants who take an oath to the constitution, and they perform their duties with professionalism and integrity.”

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