Is the IRS really hiring 87,000 new agents?
Democrats’ new climate, health care and tax package — known as the Cut Inflation Act — includes nearly $80 billion in new money for the Internal Revenue Service, which is supposed to help the chronically underfunded agency staff and strengthen enforcement to collect unpaid taxes from wealthy Americans.
The funding has become a political flashpoint in recent days among conservatives and some business groups, who have falsely claimed the IRS will use the money to hire a “army” of 87,000 new agents which will target average taxpayers.
Sen. Mike Crapo, the top Republican on the Senate Finance Committee, said the new funding would be used to ‘extract more revenue’ from Americans earning less than $400,000 because they are ‘soft targets’ .
Rep. Kevin McCarthy, the House Minority Leader, said the money would be used to “harass the middle class.” The National Federation of Independent Businesses called the enforcement efforts an “indirect tax” that would impose more audits and reviews on small businesses.
Treasury Department officials say all of these claims are false. Administration officials reiterated that they will focus enforcement efforts on wealthy Americans and big business.
The $80 billion in funding for the IRS is a small fraction of the Cut Inflation Act, which is expected to include more than $400 billion in spending. He is supposed to begin to reverse more than a decade of decadence and budget cuts at the agency. The IRS budget has been cut nearly 20% since 2010, impacting the agency’s ability to staff and modernize half-century-old technology. In 2010, the IRS had approximately 94,000 employees. That number fell to around 78,000 employees in 2021. Some of the agency’s computers still run on COBOL, a programming language that dates back to the 1960s.
Since 2010, the agency’s enforcement staff has shrunk 30%, IRS officials say, and audit rates for the wealthiest taxpayers have seen the biggest declines due to years of underfunding. The new bill is an attempt to change that.
What the Invoice Means for Most Tax Filers
The new funding is intended to help reduce the “tax gap,” or the difference between what people pay in taxes and what they owe in taxes, which the Treasury Department estimates at around $600 billion a year. . The new funds could help the IRS increase its revenue by about $200 billion over the next decade, according to an estimate by the Congressional Budget Office, though the exact amount is difficult to calculate and highly uncertain.
Natasha Sarin, a tax policy and enforcement adviser at the Treasury Department, said that for Americans earning less than $400,000 a year, their chances of being audited would not increase from typical levels in recent years. .
Instead, Sarin said, average taxpayers should have a better experience filing their taxes because the funds would allow the agency to staff up. In the first half of 2021, there were fewer than 15,000 employees available to answer nearly 200 million calls, or one person for every 13,000 calls, according to Treasury Department figures.
“For ordinary taxpayers, for small businesses, for low-income taxpayers, the only change they’re going to realize is that there will be an IRS employee who can answer the phone when they call,” he said. said Sarin.
Due to IRS downsizing, personal tax return audit rates declined for all income levels from 2010 to 2019, according to a recent report from the Government Accountability Office. Audit rates decreased the most for taxpayers with incomes of $200,000 or more.
In 2019, the audit rate for taxpayers with income between $25,000 and $200,000 was 0.17%, according to the report. For those earning $5 million or more, the audit rate was 2.35% in the same year.
A 2018 analysis by ProPublica found that while audits had dropped more dramatically for the wealthy, the IRS continued to audit poorer filers — recipients of anti-poverty tax credits, including the credit. tax on earned income – at relatively high rates.
Over the past decade, audit rates for multi-millionaires have declined twice as much as audit rates for the lowest-income families receiving the EITC, as more resources are needed to tackle to the highest earners, Sarin said.
The funding should allow the IRS to better target wealthy earners who don’t pay their taxes because the agency will be able to upgrade its technology, Sarin said, reducing the chances of compliant taxpayers being audited.
Janet Yellen, the Treasury secretary, reaffirmed similar commitments in a letter to the IRS commissioner last week.
“Contrary to misinformation from opponents of this legislation, small businesses or households earning $400,000 a year or less will not see an increased chance of being audited,” Yellen wrote.
Bill Hoagland, senior vice president of the Bipartisan Policy Center which focuses on economic policy, said improving these aspects would help make it more efficient for average earners to file their taxes, as they could more easily obtain information. to help them complete their tax forms. .
Budget cuts and reduced capacity have resulted in a large backlog of unprocessed tax forms. In early August, the IRS had a backlog of 9.7 million unprocessed 2021 individual returns.
“The long story here is that the average American shouldn’t be threatened by this, but should be grateful to invest money in taxpayer services that have drastically diminished,” Hoagland said.
Janet Holtzblatt, a senior fellow at the Tax Policy Center, said generally she thinks the IRS is committed to maintaining its goal of focusing enforcement efforts on wealthy Americans and big business. But she said that partly depends on the IRS’ ability to determine people’s “real” incomes.
“The types of taxpayers that fall into this category where there might be some uncertainty will be the self-employed, it will be partners, it will be people who receive income that is not subject to a W-2,” says Holtzblatt. “It is those whose income is not independently reported who become more difficult to identify.”
Sarin said the IRS would focus on hiring employees who have experience dealing with complex tax returns for large corporations and wealthy individuals. Average taxpayer audits follow a significantly different process, she said.
Is the IRS really going to hire 87,000 auditors?
Of the nearly $80 billion for the IRS in the bill, more than half, or about $46 billion, will be used to improve enforcement.
The IRS has yet to release estimates of how many new employees the agency could hire with the new funding from the Inflation Reduction Act. The agency is expected to release final numbers and the breakdown in the coming months.
The 87,000 figure appears to come from a Treasury Department report released in May 2021, which outlined the impact of tax compliance measures in the Biden administration’s proposed American Families Plan. The report estimates that the IRS could hire 86,852 employees by 2031 with nearly $80 billion in additional funding.
But Sarin said the new funding would also be used to hire other types of employees, such as customer service representatives and IT specialists, not just new auditors.
She also said many of the new hires would fill positions vacated by employees expected to leave the agency in the next decade. At least 50,000 of the agency’s current employees are expected to leave over the next five years because they are eligible to retire, Sarin said.
Douglas Holtz-Eakin, chairman of the conservative American Action Forum and former director of the Congressional Budget Office, said the extra funding did not guarantee the agency would be able to significantly narrow the tax gap, because the wealthy usually have lawyers. which can stretch the audit process. But the new funding would still help reverse the agency’s decline, he said.
“The workforce is down about 20%,” Holtz-Eakin said. “So anything that reverses should be considered very important.”