BIDEN PROMISES: WE WON’T USE BEEFED-UP IRS AGAINST YOU. Republicans and conservatives have loudly protested the Democratic plan to expand the IRS vastly, and especially its enforcement arm, with an infusion of $80 billion included in the misleadingly named Inflation Reduction Act. The $80 billion is, by many accounts, far more than the IRS needs, and Republicans are suspicious about how it will be spent. Last year, the Treasury Department said the money would be used to hire 86,852 new IRS employees over the next 10 years, the largest group of them assigned to auditing Americans’ tax returns.
So the GOP reaction was quick. Eighty-seven thousand new IRS agents! They’re coming for you! Now, Biden administration officials are pushing back, although it is not clear whether they will allay any fears.
The administration and Democrats in Congress maintain that increased IRS enforcement will only target “wealthy tax cheats.” That’s the phrase they like to use — “wealthy tax cheats.” Sometimes they define “wealthy” as those making more than $400,000 a year, a group that runs from reasonably successful doctors, on the lower end of the scale, all the way up to Jeff Bezos. Sometimes Democrats say they’re really targeting “millionaires and billionaires,” a phrase made famous by the millionaire Sen. Bernie Sanders (I-VT).
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But their words left a nagging suspicion. Are there really enough millionaires and billionaires to occupy 87,000 new IRS employees? Are there even enough reasonably successful doctors? Won’t a lot more people in the middle class end up being audited?
Now, Treasury Secretary Janet Yellen has written, and made public, a letter to Charles Rettig, the IRS commissioner, who, of course, works for her. The purpose of the letter is to assure the public that no, the IRS will not increase its audits of non-rich citizens.
“I write today to confirm the commitment that has been a guiding precept of the planning that you and your team are undertaking: that audit rates will not rise relative to recent years for households making under $400,000 annually,” Yellen wrote. “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. That 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.” Yellen went on to say that IRS enforcement will focus on “high-end noncompliance” — a more bureaucratic way of saying “wealthy tax cheats.”
Then Yellen claimed that for “regular taxpayers,” the likelihood of being audited will actually go down. “For regular taxpayers … the result of this resource infusion will be a lower likelihood of audit by an agency that has the data and technological infrastructure in place to target enforcement resources where they belong — on the high end of the income distribution, where the top one percent alone is estimated to not be paying $160 billion in owed taxes each year,” she wrote.
It all sounded reassuring — but what was Yellen actually saying? She said that for middle-class taxpayers, audit rates will not go up beyond what they have been in recent years. The $80 billion going to the IRS will not be used to “increase the share” of middle-class taxpayers who are audited “relative to historical levels.”
So what are the historical levels? That’s pretty important. A look at IRS audit practices from just last year, 2021, shows that auditors clearly target the middle class. If that historical level is the standard, as Yellen suggests it will be, then many, many middle-class workers will be facing audits from the newly enriched IRS.
This week, the Washington Post analyzed IRS audit data from 2021 and found that more than half, 51%, of the audits targeted taxpayers who made less than $75,000 per year. Another 26% targeted taxpayers who made between $75,000 and $200,000. Taken together, that is 77% of IRS audits targeting people who make less than $200,000 per year.
So say the IRS used the $80 billion to increase its enforcement activities. After all, about $45 billion of that is specifically earmarked for enforcement. And say that, as Yellen directed, the new enforcers “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.” Well, the historical level is 77% of audits targeting people below $200,000. If the IRS sticks to that historical level but uses its vastly increased resources to subject more of the U.S. population to scrutiny, a lot more of the middle class will be audited. Seventy-seven percent of 100 is 77. Seventy-seven percent of 1,000 is 770. Of 10,000, it’s 7,700. It’s not hard to see a lot more non-rich Americans in the IRS’s sights.
Recently the Wall Street Journal editorial page noted, “The [IRS’s] main targets will by necessity be the middle- and upper-middle class because that’s where the money is. The Joint Committee on Taxation, Congress’s official tax scorekeeper, says that from 78 percent to 90 percent of the money raised from under-reported income would likely come from those making less than $200,000 a year. Only 4 percent to 9 percent would come from those making more than $500,000.”
Perhaps Yellen was sincere in her reassurances. But who would really be reassured by what she had to say?
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