The IRS says it will use funding to crack down on the rich. Its record says otherwise

Since the surprise announcement last month that Senator Schumer (D-NY) and Senator Manchin (D-WV) had reached an agreement on the Inflation Reduction Act of 2022, the massive spending bill has received no shortage of media attention. However, much of the coverage has focused on the bill’s climate, healthcare and corporate tax provisions. Mainstream media has paid far less attention to the government’s plan to allocate $79.6 billion to the Internal Revenue Service (IRS), including $45.6 billion for enforcement efforts. 

Lawmakers say the additional funding is needed to improve agency services, upgrade operating systems, hire new employees and enhance enforcement efforts. As further evidence of this need, Congress has pointed to the steady decline in the number of audits filed each year and a growing problem with tax evasion, which costs the U.S. $1 trillion each year. In addition, IRS Commissioner Charles Rettig recently noted in testimony before the House Ways and Means Committee that the agency has shed around 17,000 employees and seen its budget decline by 20%. As a result, the agency now has roughly the same number of employees that it did in 1974. 

According to a recent Department of the Treasury report, the new spending package may enable the agency to hire as many as 87,000 new employees by 2031. While not all of these hires would be IRS agents, and some would replace existing employees, the sheer volume of potential new hires for the agency is still substantial. Time Magazine estimates the true number of new employees would likely be closer to 20,000–30,000. Regardless of the exact number, the White House hopes the plan will modernize the agency and generate $400 billion in additional revenue over the next 10 years. 

However, serious questions remain about how the IRS will spend this money. While the IRS certainly has a role to play in collecting taxes and making periodic upgrades to systems, the organization has a dubious track record when it comes to conducting audits.

Indeed, according to a recent report by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University, the IRS audited low-income households with less than $25,000 in annual earnings at five times the rate of everyone else. That rate constitutes roughly 13 audits for every 1,000 tax returns filed for this income group as opposed to just 2.6 audits for income groups with earnings above $25,000. Data from the Treasury Inspector General for Tax Administration also reveals that the IRS audited households claiming an anti-poverty Earned Income Tax Credit (EITC) with gross receipts under $25,000 more frequently than it did families with higher incomes. Just .2% of Americans with incomes between $25,000 and $500,000 experienced an audit in 2019, according to recent IRS estimates.

The IRS claims that low-income households face a disproportionate share of audits due to higher rates of improper payments, which agency systems are more likely to flag. However, the agency also acknowledges that they overwhelmingly rely on automated processes which are less complicated than in-person audits, but tend to target low-income Americans. These automated processes lean heavily on correspondence audits, where IRS agents review consumer finances with a simple phone call or a letter. The agency says correspondence audits are simply the best use of “limited examination resources.”

The problem with this approach is that it is unclear whether more funding will change how the agency allocates resources. If correspondence audits truly are more efficient than face-face audits, then no amount of new funding will change that. The agency will continue to prioritize practical considerations and audit Americans who commit more improper payments. 

In some ways, this seems reasonable. After all, the IRS must prioritize practical considerations and the good stewardship of taxpayer dollars. On the other hand, there is something profoundly disturbing about an agency that has previously shown a willingness to prioritize investigating poor Americans over their wealthier neighbors, who wield more resources to cover up potential financial infractions. 

A recent letter to the Senate by IRS Commissioner Charles Rettig is a case in point. In the Aug. 4 letter, Mr. Rettig says that agency resources are “absolutely not about increasing audit scrutiny on small businesses or middle-income Americans.” We know now that this is not the case. The preponderance of evidence suggests that Americans of all income groups do receive IRS scrutiny, and this is especially true for low-income Americans who can least afford it. 

The IRS may need additional resources, but the agency should not use these resources to target the poor. Congress should demand the IRS revamp its enforcement processes so that the new money it has provided the agency does not go to reinforcing inequitable practices. The IRS must demonstrate a good faith effort in combatting tax evasion by wealthy Americans that goes far beyond nicely worded letters to the Senate. That kind of reform will go a long way toward protecting American taxpayers and consumer savings. 

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