The Democrats’ most recent health care and climate spending bill includes an $80 billion increase for the Internal Revenue Service which aims to help the agency crack down on wealthy tax fraudsters. However, Republican critics say a larger IRS could ultimately hurt low-income Americans.
Providing the IRS with an influx of funds has been a top priority for President Biden. He has become one of the most prominent funders of the Inflation Reduction Act that Senate Majority Leader Chuck Schumer, DN.Y., and Sen. Joe Manchin, DW.Va., unveiled. In the past week.
Democrats projected that improving IRS funding could add an additional $124 billion in federal revenue over the next decade by hiring more tax agents who can limit tax evasion by wealthy individuals and corporations. Roughly $1 trillion in federal taxes go unpaid annually due to errors, fraud and a lack of resources to properly enforce collections, according to an estimate from IRS Commissioner Chuck Rettig last year.
But Republican lawmakers have sounded the alarm over the proposal, warning it could have serious ramifications for low-income workers.
That’s because the IRS disproportionately targets low-income Americans when it conducts tax audits each year. In fact, households with less than $25,000 in income are five times more likely to be audited by the agency than everyone else, according to a recent study. tax data analysis for fiscal year 2021 by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University.
The reason for this is an increase in what are known as “correspondence audits,” which means the IRS conducts reviews of tax returns through letters or phone calls rather than more complex face-to-face audits. Only a fraction, 100,000 of the 659,000 audits in 2021, were done in person.
According to the Syracuse study, more than half of the correspondence audits initiated by the IRS last year (54%) involved low-income workers with gross earnings of less than $25,000 who claimed the earned income tax credit, a anti-poverty measure.
Even taxpayers with positive total income ranging from $200,000 to $1 million were one-third as likely to be audited by the IRS compared to lower income earners. About 9 million taxpayers reported these high income levels in 2021, but fewer than 40,000 of their returns, or about 4.5 out of 1,000, were audited. That contrasts sharply with low-income Americans, who faced a rate of audit of 13 out of 1,000.
The discrepancy is primarily because high-income taxpayers have complex investments that can easily bridge gaps between taxes due and paid versus taxes reported and paid.
“Unless there is an unlikely significant change in the makeup of IRS enforcement, stepped-up IRS enforcement would subject taxpayers across the income spectrum to increased scrutiny and increased audit risk,” said right-wing Heritage. Foundation in a recent blog post.
The Heritage Foundation noted that most IRS individual audit exams target taxpayers who report less than $50,000 in adjusted gross income. Although that group earns considerably less income than others, it faced IRS-recommended tax adjustments of about $3.4 billion in tax year 2010. That compares with about $3.7 billion for Americans who file more than $50,000.
The IRS has maintained that it will not increase audits of households earning less than $400,000 if the $80 billion funding is approved.
“These resources have nothing to do with increasing audit scrutiny on small businesses or middle-income Americans,” Retting, the IRS commissioner, wrote in a letter to lawmakers Thursday. “As we have been planning, our investment of these compliance resources is designed around Treasury’s directive that audit fees will not increase relative to recent years for households earning less than $400,000.”