Former Council of Economic Advisers chairman Kevin Hassett analyzes the president’s deflationary law in “Cavuto: Coast to Coast.”
The latest health and climate spending bill from Democrats includes an $80 billion increase for Tax collection office which aims to help the agency crack down on tax fraud by the wealthy. But Republican critics say a bigger IRS could end up hurting lower-income Americans.
Keeping the IRS funded has been a top priority for President Biden. He has emerged as one of the most prominent financiers of the Cut-Inflation Act, which Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Joe Manchin, D-W.Va., unveiled last week.
Democrats have predicted that increasing IRS funding could add an additional $124 billion in federal revenue over the next decade by hiring more tax officials who can curb tax evasion by wealthy individuals and corporations. An estimated $1 trillion in federal taxes goes unpaid annually due to errors, fraud and a lack of resources for adequate collection, IRS Commissioner Chuck Rettig estimated last year.
But GOP lawmakers slammed the proposal, warning it could have serious consequences for lower-income workers.
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Internal Revenue Service headquarters in Washington, D.C., February 25, 2022. (Al Drago/Bloomberg via Getty Images/Getty Images)
That’s because the IRS disproportionately targets low-income Americans when it conducts tax audits each year. In fact, households with incomes below $25,000 are five times more likely to be audited by the agency than everyone else, according to a recent analysis of fiscal 2021 tax data by Syracuse University’s Transactional Records Access Clearinghouse (TRAC).
That’s because of the rise of what’s known as “correspondence audits,” meaning the IRS conducts reviews of tax returns via letters or phone calls, rather than more sophisticated face-to-face audits. Only a small fraction – 100,000 of the 659,000 audits in 2021 – were carried out in person.
According to the Syracuse study, more than half of the mail-in audits initiated by the IRS last year — 54 percent — involved low-income workers with gross earnings below $25,000 who claimed the Earned Income Tax Credit, an anti-poverty measure.
Even taxpayers with total positive income, which ranged from $200,000 to $1 million, were one-third less likely to be audited by the IRS than those with the lowest incomes. About 9 million taxpayers reported these high levels of income in 2021, but fewer than 40,000 of their returns were audited, or roughly 4.5 out of every 1,000. This contrasts sharply with lower-income Americans, which face an audit rate of 13 in every 1,000.
Sen. Joe Manchin, DW.Va., left, speaks with Senate Majority Leader Chuck Schumer, DN.Y., before a ceremony where President Joe Biden signed the Consolidated Appropriations Act into law, March 15, 2022, in Washington, D.C. Colombia (Chip Somodevilla/Getty Images/Getty Images)
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The discrepancy is mainly because high-income taxpayers have complex investments that can easily mask the differences between taxes owed and paid versus taxes reported and paid.
“Barring an unlikely significant change in the makeup of IRS enforcement, increased IRS enforcement would subject taxpayers across the income spectrum to greater scrutiny and greater audit risk,” the right-wing Heritage Foundation said in a recent blog post.
The Heritage Foundation noted that most individual IRS audits target taxpayers who report less than $50,000 in adjusted gross income. Although this group earns significantly less income than others, it faces IRS-recommended tax adjustments of about $3.4 billion in fiscal year 2010. That compares to about $3.7 billion for those Americans who report over $50,000.
President Joe Biden speaks about the economy and the final rule implementing the bailout program protecting multiemployer pension plans at Max S. Hayes High School in Cleveland, Ohio, July 6, 2022. (Saul Loeb/AFP via Getty Images/Getty Images)
The IRS says it won’t increase audits of households earning less than $400,000 if the $80 billion in funding is approved.
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“These resources are absolutely not about increasing audit scrutiny of small businesses or middle-income Americans,” Retting, the IRS commissioner, wrote in a letter to lawmakers Thursday. “As planned, our investment in these enforcement resources is designed around the Treasury Department’s directive that audit rates will not increase over recent years for households making less than $400,000.”
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