Is the IRS coming after middle America?
Passing both the Senate and the House of Representatives, the Inflation Reduction Act was signed into law on Tuesday, Aug 16, 2022.
This bill tackles many issues facing Americans including prescription drug pricing and climate change. According to the Committee for a Responsible Federal Budget, the bill spends a total of $485 billion which is offset by “$790 billion of new revenue and savings over 10 years.”
Managing taxes are key to ensuring its funding and ability to reduce the deficit.
With the Inflation Reduction Act’s passing, some have raised concerns over how the bill will affect taxpayers in the middle class. However, these claims are difficult to substantiate.
Let’s dig into how the bill is funded:
The Inflation Reduction Act introduces taxes on corporations, but no new taxes that would apply to individual taxpayers. Even without new taxes, it’s never too early to find ways to lower your tax liability.
One core funding element of the bill provides $80 billion to the IRS over 10 years. This money complements Congress’s annual Internal Revenue Service (IRS) funding, and increases its budget by more than 50 percent.
The additional funding is earmarked for the following areas:
- Tax law enforcement — increase the IRS’s ability to collect taxes, conduct criminal investigations, monitor assets digitally, and receive legal support. Approximately $45.6 billion will be spent on this item.
- IRS operations — cover rent, printing, postage, and telecommunications. About $25 billion is to be spent.
- Customer service technology — improve IRS customer service with technology. Roughly $4.8 billion is planned for spending here.
- Taxpayer assistance — pay for filing and account services. $3 billion is budgeted for this category.
Spending on the IRS will dramatically affect the organization itself and taxpayers. We’ll go through anticipated changes based on this new and increased spending.
Tax law enforcement
Strengthening enforcement addresses concerns about the “tax gap” — the difference between what the government collects and how much taxpayers actually owe. IRS Commissioner Rettig estimates that this tax gap is worth up to $1 trillion annually.
Despite increasing revenue without increasing taxes, one of the biggest fears about the Inflation Reduction Act is that middle-class taxpayers will experience more audits and may even be unfairly targeted by the IRS.
The bill itself works to focus increased tax enforcement funding on high earners. Government officials have also expressed this goal in their communication, including President Biden, Secretary of the Treasury Yellen, and IRS Commissioner Rettig.
In a recent letter to Commissioner Rettig, Secretary Yellen said:
“Specifically, I direct that any additional resources—including any new personnel or auditors that are hired—shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels. […] small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited.
Instead, enforcement resources will focus on high-end noncompliance.”
Although these resources will be directed toward wealthier Americans, it’s worth understanding that audit rates for individual taxpayers are three times lower now than they were in 2010, mostly resulting from the shrinking size of the IRS.
Over the years, the size of the IRS has decreased. Currently, the IRS is as big as it was in the 1970s. So, it’s not surprising that overall audit rates have dropped.
However, taxpayers claiming the Earned Income Tax Credit were far more likely to be audited than wealthier taxpayers: 2.2 percent of IRS audits were of millionaires compared to 46 percent of taxpayers with the Earned Income Tax Credit for the last fiscal year.
Going after bigger fish takes more time and work since wealthy Americans have more resources and easily hire lawyers. With more employees and improved technological resources, the IRS can spend more time on more difficult cases.
In other words, Americans may experience an overall increase in audits depending on the historical standard applied. However, the focus of audits will be on richer Americans, not working- or middle-class Americans.
In addition to its shrinking size, the IRS also faces employee turnover. As current employees retire or take jobs elsewhere, the IRS needs to hire replacements.
As current employees retire or take jobs elsewhere, the IRS needs to hire replacements.
As the IRS plans to hire just under 87,000 employees with the Inflation Reduction Act, some have worried that these hires will mostly be auditors. The majority of these hires will actually go towards hiring new employees when current employees leave — an estimated 52,000 minimum to maintain the current IRS’s size.
Its technology is also outdated, and updates with technology will also help the IRS improve its work.
Customer service technology and taxpayer assistance
It’s not hard for the IRS to improve its customer service. Currently, 90 percent of phone calls to the IRS are not answered. The IRS also started 2022 with an 11 million backlog of unprocessed 2020 tax returns, which meant that some taxpayers experienced significant delays getting refunds.
Using technology appropriately and adding personnel will help ensure taxpayers get the free assistance they need. It will help also reduce time and stress when contacting the IRS.
So, returning to the primary question: Is the IRS coming for the middle class?
It does not appear so.
Government officials from President Biden to Trump-appointed IRS Commissioner Rettig have directed the IRS to focus its attention on wealthy taxpayers and corporations.
Furthermore, the Inflation Reduction Act is designed to make the tax system fairer by adding taxes to corporations, not individual taxpayers and by ensuring tax compliance, especially by wealthy Americans who have an easier time avoiding taxes.
In sum, if your household makes less than $400,000 annually, you probably don’t have too much to worry about with the Inflation Reduction Act.
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