The $400 billion tax, health care, and climate package pushed by Democrats in the Senate over the weekend have angered Republican senators due to the significant increase in IRS funding.
Approximately half of the nearly $80 billion allocated by the plan to bolster the IRS will go directly toward stepping up enforcement actions like audits.
A total of $25 billion will be spent on operational support, $5 billion will be spent on new technology, and $3 billion will be allocated on taxpayer services, such as making IRS agents available to answer queries over the phone.
Sen. Mike Crapo (R-Idaho), the ranking member of the Finance Committee, criticized the Democrats’ reckless IRS spending hike on the Senate floor over the weekend, saying it would increase enforcement funding by about 70% over what the IRS is now anticipated to receive.
Crapo attempted to change the bill during the lengthy Senate vote session, which went long into Sunday, to specifically bar the IRS from using the extra enforcement resources on taxpayers who make less than $400,000.
However, his proposal was rejected.
The IRS commissioner Charles Rettig stressed in identical letters sent to the House and Senate last week that the new enforcement funding would be by a Treasury Department directive to ensure that audit rates of people making less than $400,000 a year would not increase, despite the amendment being rejected by Democrats in the Senate.
In a letter dated August 4, Rettig stated that “these tools are positively not about increasing audit scrutiny on small firms or middle-income Americans.”
“As we have been planning, our investment of these enforcement resources is geared around the Department of the Treasury’s mandate that audit rates will not increase relative to recent years for households making under $400,000,” the statement continued.
Rettig noted that affluent individuals and large corporations frequently use highly qualified legal teams that are out of the reach of normal taxpayers to manipulate the tax code.
“The strength, visibility, and vigorous enforcement presence maintained by our agency directed at these and other similarly situated taxpayers when they are non-compliant are critical to the integrity and fairness of our tax administrative system,” he wrote.
Kevin Brady (R-Texas), the ranking member of the House Ways and Means Committee, voiced scepticism that the agency would be able to follow its word and concentrate on wealthy taxpayers despite Rettig’s assurances.
They cannot only target the wealthy. They are, in fact, targeted today, Brady admitted on the Fox News Channel on Monday. But there will be a plethora of additional IRS agents released to the American people, and they will undoubtedly target Walmart customers and middle-class families.
According to Republicans, 87,000 additional IRS agents will be hired with the increased cash. The RNC quoted a figure from the right-wing lobbying group Americans for Tax Reform, which led to the RNC’s use of the number, which is probably speculative.
This bill contains a lot of negative aspects. But few are worse than the Democrats’ plan to double the IRS’s size and hire 87,000 new agents, according to Sen. Ted Cruz (R-Texas), who made the comment on Monday.
If you ask the people in each of our states what they want, I can assure you that they don’t want 87,000 additional IRS agents.
Sen. Lindsey Graham (R-S.C.) criticized the Inflation Reduction Act’s IRS financing provision as an example of government overreach during a press conference he conducted on Tuesday with South Carolina Governor Henry McMaster.
He stated, “If you think the federal government is out of control today, God help us when you get 87,000 new IRS officials who will be digging around under every rock and stone to rob you of money.”
A recruiting binge is now underway at the agency, but it has nothing to do with the Democratic proposal. To assist it to deal with a massive backlog of tax returns first brought on by closures during the pandemic, the IRS announced earlier this year a plan to add 10,000 new IRS agents over the next two years.
The actual legislative language of the Democratic bill, according to analysts, leaves some room for interpretation over how the money for stepped-up enforcement should be used.
Contributing editor Marie Sapirie of Tax Notes noted in a note dated August 4 that “the measure is fairly ambiguous on expectations for the IRS’s expenditure with the enhanced enforcement budget.”
“It cites ‘essential expenses for tax enforcement efforts’ along with ‘legal and litigation support and ‘enforcement of criminal statutes related tax law infractions.'”
For an agency with only about $14 billion in expenses in 2021, the additional money amounts to about $8 billion annually.
The money will stop the IRS’s long-term declining trend in resources, which started long before the pandemic disrupted IRS operations.
Almost the whole decade of the 2010s saw a decline in IRS funding and employees. According to IRS data, between 2010 and 2018, the agency’s funding fell from $14.36 billion to $11.43 billion, a loss of 20% in less than ten years.
The number of IRS employees fell by more than 22% during that time, from 95,000 in 2010 to 74,000 in 2018.
There have been a lot fewer audits as a result of these cuts. In a report released in May by the Government Accountability Office (GAO), it was discovered that during the 2010s, the audit rate for individual income tax returns decreased from 0.9 per cent to 0.25 per cent, with higher-income taxpayers experiencing a more dramatic decline in audit rates than those in lower tax brackets.
The GAO audit showed that Internal Revenue Service (IRS) officials generally blamed the trend on fewer manpower as a result of decreasing funds. For taxpayers earning $200,000 or more, audit rates fell the most.
These audits are typically more complicated, and staff approval is necessary, according to IRS officials. In general, lower-income audits are more computerized, enabling the IRS to carry out these audits even with fewer staff members.
Democrats, who have long called for increased funding for the IRS, criticized such differences.
In a May hearing of the Ways and Means subcommittee, Rep. Bill Pascrell (D-N.J.), a member of the committee, stated that “several studies reveal that the IRS is inspecting low-income families at a substantially higher rate than high-income taxpayers.”
In particular, research demonstrates that a taxpayer’s likelihood of being audited is twice as high for those earning between $200,000 and $500,000 as for those earning less than $25,000. That difference is scandalous.
Pascrell continued, “I realize that the IRS bases its audit history on staffing constraints. “I am aware that the IRS faces challenges due to Republican efforts over the past ten years to undermine the IRS’ ability to enforce tax laws on the wealthy.
Richard Neal, a Democrat from Massachusetts who chairs the House Ways and Means Committee, has also consistently lobbied for increased funding for the IRS.
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In a statement from back in February, Neal claimed that “Republicans have been starving the IRS of resources for decades, and now American taxpayers are paying the price.”
“To do its most crucial duties, such as processing tax returns, upholding the tax code, and reducing the tax gap, the IRS requires more assistance.
The agency will be unable to meet the expectations of American taxpayers without funding from Congress to replace its severely outdated systems.
The IRS’s $80 billion budget increase is expected to generate $204 billion in revenue, resulting in a net saving of $124 billion over the following ten years.
The funding also includes $15 million for a task force to create a free, direct e-file tax return system under the control of the IRS, which analysts call a “major development” for an organization that has long maintained a cordial relationship with the privately run tax preparation sector, which is dominated by industry behemoths like Intuit and H&R Block.
According to the proposed legislation, the IRS has nine months to form a task force and publish a report outlining how it would develop and run a free, direct e-file system, as well as how much it would cost to maintain the system.
