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With 87,000 new agents, here’s who the IRS may target for audits

With 87,000 new agents, here's who the IRS may target for audits

Jeffrey Coolidge | Photodisc | Getty Images

As the Democrats’ spending plan moves closer to a House vote, one of the more controversial provisions — nearly $80 billion in IRS funding, with $45.6 billion for “enforcement” — has raised questions about who the agency may target for audits.

IRS Commissioner Charles Rettig said these resources are “absolutely not about increasing audit scrutiny on small businesses or middle-income Americans,” in a recent letter to the Senate.

However, with the investment projected to bring in $203.7 billion in revenue from 2022 to 2031, according to the Congressional Budget Office, opponents say IRS enforcement may affect everyday Americans.

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“Our biggest worry in this is that the burden for these audits will land on Walmart shoppers,” Rep. Kevin Brady, R-Texas, said Tuesday on CNBC’s “Squawk Box.”

Overall, IRS audits plunged by 44% between fiscal years 2015 and 2019, according to a 2021 Treasury Inspector General for Tax Administration report.

While audits dropped by 75% for Americans making $1 million or more, the percentage fell by 33% for low-to-moderate income filers claiming the earned income tax credit, known as EITC, the report found.

Our biggest concern in this is that the burden for these audits will land on Walmart shoppers.

Rep. Kevin Brady, R-Texas

Ken Corbin, chief taxpayer experience officer for the IRS, said returns claiming the EITC have “historically had high rates of improper payments and therefore require greater enforcement,” during a May House Oversight Subcommittee hearing.

Since many lower-income Americans are wage earners, these audits are generally less complex and many may be automated.

How the IRS picks which tax returns to audit

Currently, the IRS uses software to rank each tax return with a numeric score, with higher scores more likely to trigger an audit. The system may flag a return when deductions or credits compared to income fall outside of acceptable ranges.

For example, let’s say you make $150,000 and claim a $50,000 charitable deduction. You’re more likely to get audited because it’s “disproportionate” to what the system expects, explained Lawrence Levy, president and CEO of tax resolution firm Levy and Associates.

Other red flags for an IRS audit may include unreported income, refundable tax credits such as the EITC, home office or auto deductions, and rounded numbers on your return, experts say.

How IRS audits may change with more funding

While the legislation still must be approved by the House and signed into law, it will take time to phase in the funding, hire and train new workers.

The IRS aims to hire roughly 87,000 new agents, according to the Treasury Department.

New auditors may have a six-month training program and receive cases worth a few hundred thousand dollars rather than tens of millions, Levy said.

“You’re not going to give a new General Motors trainee, for example,” he said. “It just isn’t going to happen.”

The chance of an audit may increase for self-employed taxpayers, Levy said, depending on their return. However, the odds may not change for traditional workers with an error-free filing, he said.

“The W-2 employee is much less likely to get audited than a self-employed person by far, in my opinion,” Levy said.

Of course, one of the best way to avoid future headaches is by keeping accurate records with detailed bookkeeping and saving all receipts, he said.

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Hawaii is the ‘perfect place to retire by the beach,’ says millionaire—but there are 3 big downsides

Hawaii is the 'perfect place to retire by the beach,' says millionaire—but there are 3 big downsides

In 2012, at 34 years old, I left my investment banking job and retired early with a net worth of $3 million. Currently, I live in San Francisco with my wife and two young children.

But since 1977, I’ve regularly traveled back and forth to Hawaii, where my parents have been retired for 15 years. They have a simple life with a modest budget, living off retirement savings and a government pension — thanks to the three decades they spent working in the US Foreign Service.

Seeing my parents live their dream, we want to follow suit. Our plan is to move to Hawaii by 2025. Between my parents’ experience and my own, I’ve learned a lot about the ins and outs of retiring in Hawaii.

Our consensus it’s the perfect place to retire by the beach — although there are still a few downsides to keep in mind.

How much money do you need to retire in Hawaii?

Hawaii was ranked ranked in the top five states where Americans want to retire the most. But it also has the highest cost of living in the US

Many financial experts suggest maintaining a 4% withdrawal rate to ensure that your investments last throughout retirement.

The median household income in Honolulu County, for example, is $88,000. If someone wanted to withdraw that $88,000 from their assets each year, they’d need about $2,200,000 in investments to withdraw at a rate of 4%.

But that’s just one example. How much money you need depends on where you’d like to live, your standard of living and your expected income.

If you can comfortably live off $42,500 a year, have a pension or can file for Social Security, you can have a lower net worth and less income-generating investments at the beginning of your retirement journey.

The downsides of retiring in Hawaii

Before you start your beach retirement plan, beware of these three biggest downsides first:

1. High cost of housing

As of June 2022, the median single-family home price in Honolulu is $1,050,000. Meanwhile, the median price for a condo on Oahu, which is considered a great place to retire on a budget, is currently $535,000 — up 16% from June 2021.

If you want to retire in Hawaii, consider buying a small condo or rent, rather than purchasing a single-family home. The average rent for a 594 square foot apartment is roughly $2,042, according to RentCafe.

2. Expensive groceries and gas

According to a 2021 report by the Missouri Economic Research and Information Center, Hawaii’s grocery prices are the highest in the nation.

For example, I’ve paid $8.99 for a gallon of whole milk on Oahu, whereas in San Francisco, it’s about $6. And while Hawaiian-grown mangoes are delicious, they can cost about $6 each!

Further, if you like to drive, Hawaii has unusually high gas prices. The average price per gallon in the state today is $5.41 and is continuing to rise, according to AAA, while the national average is $4.03.

3. You may feel claustrophobic

It only takes about four hours to drive around the 597 square miles of Oahu. Although the island does hold about one million people, in my experience, it can still feel small.

And with the pandemic continuing to make air and ship travel unappealing, it is possible that you could feel a bit stuck at times, without those options at your disposal.

The benefits of retiring in Hawaii

Yes, it’s expensive. But if you’re curious what it could be like to retire in Hawaii, here are some surprising perks:

1. Less stress and top health care

Hawaii was ranked second in terms of happiness and well-being in a 2021 study from health care company Sharecare.

My parents worked in Washington DC, Paris, Guangzhou, Kobe, Taipei and other big cities before retiring in Honolulu. They’ve found their Hawaiian lifestyle to be incredibly relaxing compared to all the other cities they’ve lived in.

2. Top-rated healthcare

The United Health Foundation also ranks Hawaii as the third healthiest state in the country. And according to US News’ list of Best States for Health Care, Hawaii takes the top spot.

I’m not surprised. Hawaii has beautiful weather nearly year-round, public beaches and parks, a variety of locally grown and raised food, and great access to preventive medical and dental treatment.

If you’re looking for a more healthy and active lifestyle, you can certainly find it in Hawaii.

3. ‘Ohana’ means family

An important part of Hawaiian culture is the care and nurturing of family and friends, or “ohana.” I’ve observed that nearly everywhere you go, whether it’s to a restaurant or to the mall, things are set up to be a family-friendly experience.

Plus, it’s not uncommon to have multiple generations under one roof in Hawaii. While my wife, children and I probably won’t live in my parents’ house, we hope to rent or buy nearby.

4. Tremendous diversity

Hawaii topped the list of states that have the most diverse population in the country, coming ahead of California and Nevada, according to data from the US Census Bureau.

5. Decent tax advantages

Hawaii ranks as having one of the lowest property tax rates in the country, at an average of only 0.28%. If you have a Federal pension, it’s exempt from state income tax. And the sales tax rate is a reasonable 4% to 4.5%, versus 7.25% to 8.25% in California.

However, Hawaii also has one of the highest state income tax rates, topping out at 11% if you make over $200,000. If you make between $48,001 and $150,000, you pay a state income tax rate of 8.25%.

Why I want to retire in Honolulu

For my family, moving to Honolulu will actually save us money. the Median San Francisco home price is about $1,633,650, much higher than in Honolulu.

If we move, we’d sell our home here and pay cash for a property in Honolulu that’s around 40% cheaper. We’d then reinvest the house savings into real estate crowdfunding, dividend stocks and REITs to increase our passive income for retirement.

Instead of needing $300,000 a year in passive investment income to fund the lifestyle we desire, $150,000 to $200,000 is probably plenty in Honolulu.

But more than that, with my parents in their 70s, I’d like to spend as much time with them as possible. Hawaii just feels like home.

Sam Dogen worked in investing banking for 13 years before starting Financial Samurai, his personal finance website. His new book “Buy This, Not That: How to Spend Your Way to Wealth and Financial Freedom” is out now. Follow him on Twitter @financialsamura.

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Reconciliation bill includes nearly $80 billion for IRS funding

Reconciliation bill includes nearly $80 billion for IRS funding

Charles P. Rettig, commissioner of the Internal Revenue Service, testifies during the Senate Finance Committee hearing titled The IRS Fiscal Year 2022 Budget, in Dirksen Senate Office Building in Washington, DC, June 8, 2021.

Tom-Williams | Pool | Reuters

Senate Democrats on Sunday passed their climate, health and tax package, including nearly $80 billion in funding for the IRS.

Part of President Joe Biden’s agenda, the Inflation Reduction Act allocates $79.6 billion to the agency over the next 10 years. More than half of the money is meant for enforcement, with the IRS aiming to collect more from corporate and high-net-worth tax dodgers.

The remainder of the funding is earmarked for operations, taxpayer services, technology, development of a direct free e-file system and more. Collectively, those improvements are projected to bring in $203.7 billion in revenue from 2022 to 2031, according to recent estimates from the Congressional Budget Office.

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IRS audits have plunged over the past decade, with the biggest declines among the wealthy, according to a May 2022 report from the Government Accountability Office.

The audit rate for Americans making $5 million or more dropped to about 2% in 2019, compared to 16% in 2010, the report found. The agency said it is working to improve these numbers.

However, if the Inflation Reduction Act is approved by the House and signed into law, it will take time to phase in the added IRS funding, explained Garrett Watson, a senior policy analyst at the Tax Foundation. The Congressional Budget Office only estimates about $3 billion of the $203.7 billion in revenue for 2023.

“We didn’t get to this state with the agency overnight, and it will take longer than overnight to go in the right direction,” he said.

IRS: We won’t boost ‘audit scrutiny’ on the middle class

While advocates applaud the enhanced IRS budget, opponents argue the beefed-up enforcement may affect more than wealthy Americans, violating Biden’s $400,000 pledge.

“My colleagues claim this massive funding boost will allow the IRS to go after millionaires, billionaires and so-called rich ‘tax cheats,’ but the reality is a significant portion raised from their IRS funding bloat would come from taxpayers with income below $400,000, ” Sen. Mike Crapo, R-Idaho, ranking member of the Senate Finance Committee said in a statement.

IRS Commissioner Charles Rettig said the $80 billion in funding would not increase audits of households making less than $400,000 per year.

“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,” he wrote in a letter to the Senate.

“These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans,” he added.

More than two-thirds of registered voters support increasing the IRS budget to strengthen tax enforcement on high-income taxpayers, according to a 2021 poll from the University of Maryland.

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Is the economy in a recession? Top economists weigh in

Is the economy in a recession? Top economists weigh in

‘We should have an objective definition’

Officially, the NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” In fact, the latest quarterly gross domestic product report, which tracks the overall health of the economy, showed a second consecutive contraction this year.

Still, if the NBER ultimately declares a recession, it could be months from now, and it will factor in other considerations, as well, such as employment and personal income.

What really matters is their paychecks aren’t reaching as far.

Thomas Philipson

former acting chair of the White House Council of Economic Advisers

That puts the country in a gray area, Philipson said.

“Why do we let an academic group decide?” he said. “We should have an objective definition, not the opinion of an academic committee.”

Consumers are behaving like we’re in a recession

For now, consumers should be focusing on energy price shocks and overall inflation, Philipson added. “That’s impacting everyday Americans.”

To that end, the Federal Reserve is making aggressive moves to temper surging inflation, but “it will take a while for it to work its way through,” he said.

“Powell is raising the federal funds rate, and he’s leaving himself open to raise it again in September,” said Diana Furchtgott-Roth, an economics professor at George Washington University and former chief economist at the Labor Department. “He’s saying all the right things.”

However, consumers “are paying more for gas and food so they have to cut back on other spending,” Furchtgott-Roth said.

“Negative news continues to mount up,” she added. “We are definitely in a recession.”

What comes next: ‘The path to a soft landing’

The direction of the labor market will be key in determining the future state of the economy, both experts said.

Decreases in consumption come first, Philipson noted. “If businesses can’t sell as much as they used to because consumers aren’t buying as much, then they lay off workers.”

On the upside, “we have twice the number of job openings as unemployed people so employers are not going to be so quick to lay people off,” according to Furchtgott-Roth.

“That’s the way to a soft landing,” she said.

3 ways to prepare your finances for a recession

While the impact of record inflation is being felt across the board, every household will experience a pullback to a different degree, depending on their income, savings and job security.

Still, there are a few ways to prepare for a recession that are universal, according to Larry Harris, the Fred V. Keenan Chair in Finance at the University of Southern California Marshall School of Business and a former chief economist of the Securities and Exchange Commission .

Here’s his advice:

  1. Streamline your spending. “If they expect they will be forced to cut back, the sooner they do it, the better off they’ll be,” Harris said. That may mean cutting a few expenses now that you just want and really don’t need, such as the subscription services that you signed up for during the Covid pandemic. If you don’t use it, lose it.
  2. Avoid variable-rate debts. Most credit cards have a variable annual percentage rate, which means there’s a direct connection to the Fed’s benchmark, so anyone who carries a balance will see their interest charges jump with each move by the Fed. Homeowners with adjustable-rate mortgages or home equity lines of credit, which are pegged to the prime rate, will also be affected.

    That makes this a particularly good time to identify the loans you have outstanding and see if refinancing makes sense. “If there’s an opportunity to refinance into a fixed rate, do it now before rates rise further,” Harris said.

  3. Consider stashing extra cash in Series I bonds. These inflation-protected assets, backed by the federal government, are nearly risk-free and pay a 9.62% annual rate through October, the highest yield on record.

    Although there are purchase limits and you can’t tap the money for at least one year, you’ll score a much better return than a savings account or a one-year certificate of deposit, which pays less than 2%. (Rates on online savings accounts, money market accounts and certificates of deposit are all poised to go up but it will be a while before those returns compete with inflation.)

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Federal emergency savings proposals may also increase retirement funding

Federal emergency savings proposals may also increase retirement funding

Nirunya Juntoomma | istock | Getty Images

It’s no secret that households with sufficient emergency savings are more the exception than the norm.

Two proposals in the Senate aim to change that. And, experts say, tackling the problem could lend itself to workers saving more for their golden years.

“One of the best ways to protect retirement savings is to help families more effectively weather short-term emergency savings needs,” said Angela Antonelli, executive director of Georgetown University’s Center for Retirement Initiatives.

Pandemic showed the need for savings

The Covid-19 pandemic shone a light on the many workers who were unprepared for the financial struggles that ensued from suddenly being without a job and income. While generous government aid aimed to keep families afloat as the economy righted itself, Americans now find themselves battling inflation and rising interest rates that are making both buying and borrowing more expensive.

The overall share of Americans who are either very comfortable (13%) or somewhat comfortable (29%) with their emergency savings dropped to 42% in June from 54% two years ago, according to a recent Bankrate report.

While some companies are offering emergency savings accounts to employees, the Senate proposals come with certain parameters and are both linked to 401(k) plans.

The proposals were approved in separate committees in late June as part of that chamber’s evolving version of the so-called Secure Act 2.0. The legislation would build on the original Secure Act of 2019 by making additional changes to the US retirement system in an effort to increase the ranks of savers and the amount they’re putting away for their post-working years.

The first proposal being considered would allow companies to automatically enroll their employees in emergency savings accounts, at 3% of pay, that could be accessed at least once a month. Workers would be able to save up to $2,500 in the account, and any excess contributions would automatically go to a linked 401(k) plan account at the company.

The other Senate proposal takes a different approach: It would let workers withdraw up to $1,000 from their 401(k) or individual retirement account to cover emergency expenses without having to pay the typical 10% tax penalty for early withdrawal if they are under age 59½ .

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However, a separate account would be the preferable of the two so that people would be less likely to make withdrawals from their 401(k), Antonelli said.

“It helps prevent leakage from retirement savings,” she said.

However, for workers who have access to a 401(k) or similar workplace plan but don’t participate, having emergency funds available could spur them to enroll in their company’s retirement plan, said Leigh Phillips, president and CEO of SaverLife, a nonprofit focused on helping households build savings.

“One of the big things that prevents people participating in long-term savings is a lack of short-term liquidity for emergencies,” Phillips said.

One of the big things that prevents people participating in long-term savings is a lack of short-term liquidity for emergencies.

leigh phillips

President and CEO of SaverLife

In traditional 401(k) plans, where contributions are made pre-tax, the penalty for withdrawing from an account comes with a 10% tax penalty if the person is under age 59½ (unless they meet an exception allowed by the plan).

“Having money locked away that you can’t touch is alarming to some people,” Phillips said.

That concern is addressed in state-facilitated retirement programs, which generally auto-enroll workers — those without access to a workplace plan — into Roth IRAs (individuals can opt out of enrollment if they want).

Why Roth accounts can give peace of mind

Roth accounts come with no upfront tax break for contributions as traditional IRAs do, but you generally can reclaim your contributions at any time without an early-withdrawal penalty.

The Roth structure “offers greater flexibility and more conditions that allow someone to tap those savings if they need to,” Antonelli said.

Altogether, 46 states have either implemented or considered legislation since 2012 to create retirement savings initiatives to reach workers without a plan at work. More than $476 million is collectively invested through these plans, according to Antonelli’s organization.

Although there are some minor differences among the state-run programs, the general idea is that employees are automatically enrolled in a Roth IRA through a payroll deduction (starting around 3% or 5%) unless they opt out.

It’s uncertain if either of the Senate’s emergency-savings proposals would make it into that chamber’s final version of the Secure Act 2.0, or whether an approved provision would look exactly like what’s been proposed.

The House passed its version of the Secure Act 2.0 in March. It’s uncertain when the Senate may revisit its rendition. Assuming senators give their approval, differences between their legislation and the House bill would need to be worked out before a final version could be fully approved by Congress.

If it doesn’t happen this year, the legislative process would start over in a future Congress.

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