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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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Categories
US

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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