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Republicans stoke fears of auditor ‘army’ after Democrats boost IRS funding to crack down on tax-dodging

From left: Sens. Jim Risch and Mike Crapo, R-Idaho, and Ron Wyden, D-Oregon, listen during a Boise gathering in July 2022 to mark the passage of a law that will treat wildfire spending like any other national disaster.  (Kelsey Grey/Tribune News Service)

WASHINGTON – The landmark health care and climate bill Democrats passed in August struck a rare balance: It increases federal spending to lower health insurance and prescription drug costs and speed the nation’s transition to low-carbon energy, while raising more than enough revenue to offset that spending without raising income taxes on all but the wealthiest Americans.

Much of the $740 billion in new revenue the legislation is predicted to raise, according to projections by the nonpartisan Congressional Budget Office, will come from giving the IRS more resources to make sure Americans are paying the taxes they already owe. The IRS, which has seen its budget and workforce shrink over the past decade, would collect an estimated $204 billion in otherwise unpaid taxes at a cost of about $80 billion to boost enforcement over 10 years, for a net gain of $124 billion.

“We always say spending increases don’t pay for themselves, but this is the one exception,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, a nonprofit that advocates for deficit reduction. “When we put more money in the IRS, it actually does pay for itself, and then some.”

With the bill’s other provisions relatively popular among voters, according to polls, Republicans have focused their attacks in recent weeks on the IRS enforcement funding. Sen. Mike Crapo of Idaho, the top Republican on the Senate Finance Committee, warned in an Aug. 25 Fox News op-ed that the money will let the IRS “hire an army of auditors to squeeze $204 billion out of taxpayers.”

The Biden administration has said the IRS will use the funds to crack down on tax-dodging by corporations and the wealthiest Americans, with Treasury Secretary Janet Yellen directing IRS chief Charles Rettig in an Aug. 10 letter not to increase audit rates “relative to historical levels” on those earning under $400,000 a year.

“This means that, contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited,” Yellen wrote.

But Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center and a former Treasury Department official, said audit rates have declined so much in recent years that low- and middle-income taxpayers may be more likely to have their tax returns scrutinized, depending on how the IRS interprets “historical levels.” Just 0.4% of all individual returns were audited in 2019, down from 1.1% in 2010.

“It would be helpful if we had more details from the Treasury Department and more transparency from the IRS,” Holtzblatt said, adding that without increasing audit rates, “you’re taking risks with your ability to collect revenue from people who are purposely not complying with the tax code.”

While there is little bipartisan consensus on tax policy, Republicans and Democrats largely agree the IRS has reached an embarrassing level of dysfunction. The agency answered only 9% of 167 million calls for help during the 2021 tax season, according to the independent Taxpayer Advocate Service, at a time when many taxpayers are dealing with delayed refunds from more than 21 million unprocessed returns.

The IRS workforce has declined from more than 116,000 in 1992 to fewer than 95,000 in 2010 and roughly 78,000 in 2021, partly due to a budget that hasn’t kept pace with inflation. Staff losses have been especially acute, Holtzmann said, among experienced auditors who could handle the complex tax returns of large corporations and the ultrawealthy.

IRS employees rely on fax machines and half-century-old computer systems that require them to enter numbers line-by-line from tax returns filed on paper, rather than using now-ubiquitous technology that automatically scans text into a computer. Modernizing that technology, Yellen said in her letter to Rettig, should also reduce the number of taxpayers who are wrongfully audited.

“It’s going to help bring the agency up into the 21st century,” Holtzblatt said of the new funding. “The obsolete technology has just reinforced the problems caused by a reduced staff, and it’s certainly not because the IRS has fewer responsibilities.”

On top of its usual roles, in the past few years the IRS has been tasked with distributing pandemic-era stimulus and child tax credit payments to Americans and enforcing sanctions on Russia for its invasion of Ukraine.

In an interview, Crapo said he agreed the IRS has needed more funding to update its technology and provide better service to taxpayers, but he said that could be done for far less money. Of the $80 billion Democrats sent to the IRS, $3.2 billion is earmarked for taxpayer services and $4.8 billion to modernize technology.

Other GOP politicians and pundits have gone further than Crapo in their criticism of the new funding.

Fox News host Laura Ingraham on Aug. 9 called the tax collection agency a “new Gestapo,” referring to the secret police in Nazi Germany. Her fellow Fox News host Brian Kilmeade speculated in an Aug. 11 segment the additional IRS employees would “hunt down and kill middle-class taxpayers that don’t pay enough.”

“How long until Democrats send the IRS ‘SWAT team’ after your kids’ lemonade stand?” Republican National Committee chairwoman Ronna McDaniel wrote on Twitter on Aug. 11.

Sen. Rick Scott of Florida, who chairs the National Republican Senatorial Committee and is among the richest members of Congress, wrote an “open letter” Aug. 16 urging job seekers not to work for “Biden’s IRS Army” and falsely claiming that the roughly 87,000 employees the IRS has said it wants to hire over the next decade will be “mostly armed.”

In reality, the only IRS employees who carry a gun are the roughly 2,000 special agents in the criminal investigation division – fewer than 3% of the approximately 78,000 employees the agency had as of 2021 – who focus on drug trafficking and major fraud cases.

“Most auditors are behind a keyboard crunching numbers,” Goldwein said. “They’re not breaking down your door.”

Threats against IRS employees prompted Rettig to launch a security review on Aug. 23, the first such review since anti-government extremists bombed a federal building in Oklahoma City in 1995, killing 168 people.

“Those kinds of threats, to the extent they are occurring, are inappropriate and should be stopped,” Crapo said.

In an Aug. 24 statement, Chad Hooper, executive director of the Professional Managers Association, a group representing IRS and other federal employees, blamed the increase in threats on “grossly exaggerated, misleading, and baseless claims made by lawmakers and right-wing extremists alike that the IRS is somehow assembling an army to attack taxpayers.”

The figure of 87,000 new employees comes from a 2021 report in which the Treasury Department, which includes the IRS, spelled out how it could close the “tax gap” – the difference between what taxpayers owe and what they actually pay. Most of the new hires would replace the roughly 50,000 employees Rettig told lawmakers in 2021 are expected to retire within five years.

Estimates on the size of the tax gap vary widely, with the IRS calculating an average of $381 billion in uncollected taxes from 2011 to 2013, the most recent years for which the agency has analyzed data. That translates to a compliance rate of about 83%, but with audit rates lower today than during that period, the gap could be larger. Rettig told lawmakers in 2021 the IRS could be missing as much as $1 trillion each year.

“Our tax code is in many ways sort of a voluntary, self-report system,” Goldwein said, but it relies on taxpayers knowing they may be audited.

“You probably could steal from the grocery store and get away with it, and you don’t because it’s the right thing to do,” he said. “But also you don’t because you know there’s a chance you could get caught.”

During an overnight “vote-a-rama” session before Democrats passed the tax and spending bill on a party-line vote, Crapo introduced an amendment that would have largely eliminated that incentive by barring the IRS from using the new funds to audit anyone who reports less than $400,000 in taxable income, which includes about 98% of all taxpayers.

Democrats had included language in the bill – before Republicans used a procedural rule to remove it – that said the audit rate would not increase for taxpayers who earn less than $400,000. Crapo’s amendment would have blocked using the new funds for any such audits, but since the very wealthy can use write-offs to lower their taxable income, the amendment would have given them another path to avoid scrutiny.

In a statement, Sen. Ron Wyden, an Oregon Democrat who chairs the Senate Finance Committee, accused Republicans of “fear mongering to protect wealthy tax cheats,” who have “armies of accountants and lawyers.”

“The IRS is outgunned when it comes to policing tax cheating at the very top,” Wyden said. “This funding will allow the IRS to level the playing field with its own highly skilled enforcement staff capable of looking at the complex structures the wealthy use to avoid paying what they owe. Working people don’t play these games. They already pay what they owe.”

But Crapo pointed to a 2021 analysis by the nonpartisan Joint Committee on Taxation that projected most of the additional revenue the IRS could collect by narrowing the tax gap would come from low- and middle-income taxpayers. Rather than auditing those people, Crapo said, the IRS should improve its service to help them pay their taxes correctly.

“The amount of taxes that are unpaid falls very heavily on those who simply need the IRS to help them understand the tax code and help them get their taxes filed properly,” he said. “It’s not people who need to have an audit army turned loose on them.”

In his Fox News op-ed, Crapo cited an analysis of IRS by the Finance Committee that found just over half of IRS claims that go to court are rejected, which he called “firm evidence innocent taxpayers are often subjected to unnecessary and inappropriate scrutiny.”

For now, the chances of being audited by the IRS are relatively low by historical standards. When taxpayers file their returns in 2023, they will be able to claim new deductions – including for heat pumps and certain electric vehicles – thanks to the tax-and-spending bill.