Audit tax: Stepped-up IRS enforcement in Dem spending bill could hurt poor, middle class the most
Inflation Reduction Act would create de facto tax through new wave of audits, which may disproportionately impact small businesses and the poorest Americans.
Democrats' massive spending package currently making its way through Congress would ramp up IRS audits targeting the American people — audits which, according to recent studies, would likely impact lower-income and middle-class taxpayers the most.
The so-called Inflation Reduction Act includes nearly $80 billion in additional funding for the IRS over 10 years. More than half of the total funding, $45.6 billion, is for stepped up "enforcement" of tax compliance, including more audits.
With the increased funds, the IRS would hire more employees, including auditors. The Treasury Department estimated in a 2021 report that roughly $80 billion for the IRS would enable the agency to hire about 87,000 employees by 2031. However, the hires may cover a range of positions beyond just auditors, such as IT workers and customer service staff.
"The majority of new employees will replace the standard level of staff departures over the next few years," a Treasury official told CNBC.
Both the IRS and the Treasury Department have been on the defensive about the Inflation Reduction Act, trying to assuage fears of empowered tax collectors eager to audit the American people.
"These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans," IRS Commissioner Charles Rettig wrote in a recent letter to the Senate, claiming the agency won't increase audits on households earning less than $400,000.
"It is wholly inaccurate to describe any of these resources as being about increasing audit scrutiny of the middle class or small businesses," added Treasury official Natasha Sarin in a statement to Time. The Biden administration tapped Sarin to beef up IRS auditing power.
Despite their comments, however, Americans are concerned additional funding for the IRS could lead to more audits for average taxpayers.
"It is extremely stressful for anyone to face an IRS audit, and any attempt to push back against the audit will require investment of significant time and effort," Benjamin Wilkerson, an attorney at North Mississippi Rural Legal Services (NMRLS), told Just the News.
"Our biggest worry in this is that the burden for these audits will land on Walmart shoppers," Rep. Kevin Brady (R-Texas) told CNBC's "Squawk Box" on Tuesday.
Several recent studies indicate Brady's concerns may be warranted.
An analysis by Syracuse University's Transactional Records Access Clearinghouse (TRAC), for example, found that low-income wage earners with less than $25,000 in total earnings were audited at a rate five times higher than everyone else in fiscal year 2021.
"A large increase in federal income tax audits targeting the poorest wage earners allowed the Internal Revenue Service to keep overall audit numbers from further declines for Americans as a whole during FY 2021," the report stated. "Does it make sense from either an equity or revenue standpoint to focus IRS's limited firepower on the poorest taxpayers among us — those with incomes so low they have filed returns claiming an anti-poverty earned income tax credit? This question alone raises profound issues."
According to TRAC, this pattern of targeting the poorest wage earners with audits has continued into this fiscal year.
TRAC noted the hiring of more IRS agents would better position the agency to audit more high-income earners.
"The IRS absolutely targets lower-income taxpayers for audits, in my opinion," said Wilkerson, director of the NMRLS Mississippi Taxpayer Assistance Project. A wealth of data from recent years supports this notion.
"Low-income taxpayers are low-hanging fruit for the IRS," Wilkerson continued. "The audit process is cheaper and easier on the government's end (much of it is automated, especially at the outset) with the added benefit that many of the targeted taxpayers will not have the time or resources necessary to dispute the audit findings."
A recent analysis released by House Republicans concluded Americans who earn less than $75,000 per year will receive 60% of the additional tax audits expected under the Democrats' new spending bill.
A report by the Government Accountability Office in May found that while audits decreased for Americans of all income levels from 2010 to 2019, audit rates decreased the most for taxpayers with incomes of $200,000 and above. IRS officials said this trend was the result of reduced staffing due to decreased funding, noting lower-income audits are generally less complex and more automated so they can still be conducted even with fewer staff.
The GAO report also found that, from fiscal years 2010 to 2021, the majority of the additional taxes the IRS recommended from audits came from taxpayers with incomes below $200,000. However, "the additional taxes recommended per audit increased as taxpayer income increased."
The wealthiest Americans won't be the targets of a surge in audits, according to Steven Hayes, president of Americans for Fair Taxation.
"It's going to be, as it has been in the past, primarily on people making under $200,000," Hayes told the John Solomon Reports podcast. "They can go out and close 10 low-income audits in the time it would take them to close one audit of a $150,000 taxpayer who's got a CPA representative."
Audits can be arbitrary, with IRS agents able to somewhat arbitrarily determine what taxpayers owe, Hayes explained, and people generally just pay it rather than invest more time, energy, and money to fight the government.
"Legalized extortion — we've got a system that encourages that type of attitude in the audit," he said.
The Congressional Budget Office has projected Democrats' proposed boost in IRS funding would increase tax collections by about $200 billion from 2023 to 2031. Last week, the Congressional Joint Committee on Taxation estimated between 78% and 90% of that $200 billion will come from those making less than $200,000 a year. Just 4% to 9% is expected to come from those making more than $500,000.
Experts say it's difficult to calculate an average cost of an IRS audit for the ordinary American, since each audit is unique to a particular circumstance. However, Hayes estimates it's at least $3,000-$5,000.
Some organizations put the figure even higher.
According to the North Carolina Association of Certified Public Accountants, the average additional tax owed is $6,014 for a mail audit and $21,918 for a more intrusive IRS field audit, not including additional penalties.
H&R Block has found similar numbers for IRS mail audits but has said the average amount owed for more extensive office and field audits is $65,000.
Beyond the potential of paying more in taxes, Americans often also spend thousands of dollars on lawyers or accountants to help with the auditing process, which can be complex and require going through confusing paperwork. Poorer Americans, however, generally can't afford accountants and struggle through the process without professional guidance, according to experts.
However, this scratches at the surface of what audits can do to low-income taxpayers.
"The burden faced by low-income taxpayers during an audit is significant," said Wilkerson. "The emotional stress of dealing with the IRS at a time when they may be facing numerous other issues in their life is certainly something to consider. The audit is also likely to cause a major, tangible financial impact. Most taxpayers who are chosen for audit will have their refunds frozen pending the outcome of the audit. Obviously, this is an unwelcome event for individuals who are likely counting on that money for necessary living expenses. Even if the individual ultimately prevails and proves that they were eligible for the refund, that money might not show up in their hands for months or even years after the initial return was filed."
Another issue that taxpayers can face when confronted with audits is the legal process should they challenge the IRS. Unlike normal courtrooms, where defendants are presumed innocent until proven guilty, in tax court the burden of proof is on the taxpayer to prove the IRS wrong.
The Inflation Reduction Act passed the Democrat-led Senate on a party line vote on Sunday. The bill is heading to the Democrat-controlled House, where it's expected to pass this week and head to President Biden's desk. Biden has endorsed the bill and said he would sign it into law.
Wilkerson expressed hope that the increased IRS funding and manpower in the bill will lead to better communication and efficiency, noting the agency has had issues with answering the phone and sending out notices in a timely manner.
"The IRS appears to be saying all of the right things in regard to the new funding, as one would expect," he said. "But I'm skeptical that they would change course on their audit practices. I believe that they currently pursue a 'path of least resistance' when it comes to choosing who to audit, and I'm not sure that it's feasible for an entity like the IRS to drastically change their practices in order to pursue a more difficult path."
Earlier this week, Just the News reported the Inflation Reduction Act would create substantial de facto tax hikes on lower-income and middle-class Americans, violating Biden's promise not to raise taxes on Americans making less than $400,000 a year.