The head of the Internal Revenue Service has declared that the agency that collects taxes will “definitely not” use $80 billion in new funds to ramp up the audits of low- and middle-income Americans. “The resources in the reconciliation package will get us back to historical norms in areas of challenge for the agency — large corporate and global high-net-worth taxpayers — as well as new areas like pass-through entities and multinational taxpayers with international tax issues, where we need sophisticated, specialized teams in place that are able to unpack complex structures and identify noncompliance,” IRS Commissioner Charles Rettig wrote in a letter.
In his recent letter regarding the proposed plan to hire 87,000 new agents as part of the so-called Inflation Reduction Act Rettig sought to reassure the U.S. Senate. He added that “our investment of these resources is designed about the Department of the Treasury’s directive that audit rates will not rise relative to recent years for households making under $400,000.”
It is unclear whether the estimate of 87,000 new employees is accurate. However, the Inflation Reduction Act is designed to inject the tax agency with funds it urgently needs. It is estimated that the IRS will spend about $46 billion on hiring more enforcement officers and tracking taxes on crypto-currencies, which is a relatively new area of its work.
According to Yellen, not increasing the audit rate for households earning under $400,000 (a group that is sometimes considered as middle class in Washington) has been “a driving precept” for the IRS as it forecasts spending the additional funding it expects to receive, in the coming years, including about $45 billion allocated to enforcement.
In its report last week, the nonpartisan Joint Oversight Committee on Taxation estimated that small businesses would contribute between 78% and 90% of the estimated $200 billion the Internal Revenue Service will be collecting through workforce enhancement, said the NY Post. “Anytime people hear the IRS will auditing more, they are going to be concerned,” Eric Bronnenkant, head of tax at financial services firm Betterment, noted. However, he stated, “The audit rates are not likely to increase dramatically, I would argue, for people whose sole income is a W-2 and maybe $100 in interest from their bank account.”
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According to President Joe Biden and the Democratic Party, Americans earning less than $400,000 a year would not be asked to pay a penny more in taxes. Under the Inflation Reduction Act, $370 billion would go to fight climate change, while $64 billion would go to reduce healthcare costs for people with health plans. Democrat lawmakers hope the IRS will step up audits and enforcement efforts in order to collect billions currently lost in the “tax gap.”
According to Hinchman, the IRS has an easier time collecting from small and medium-sized businesses since those companies are less likely to incur legal fees when fighting the agency – while large, wealthier companies have a much better chance of fighting back. “I think they’ll collect it but it will be quite painful,” Hinchman said.