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August 29, 2022

Beware: A More Aggressive IRS Is on the Way

Be sure to save your receipts.

When President Biden signed the Inflation Reduction Act earlier this month, he set in motion the largest expansion of the Internal Revenue Service in history. The law will allocate an astonishing $80 billion in additional funding for the federal tax agency over the next nine years, enough to hire almost 87,000 new employees between now and 2031. According to the Congressional Budget Office, that will “more than double” the number of staffers working for the IRS. The law was passed with the unanimous support of every Democrat in Congress — and not a single Republican. And do you know what the president said about this lavish vote of confidence in the IRS in his remarks at the signing ceremony? Not a word.

Granted, the Inflation Reduction Act contained other provisions, including significant measures affecting drug prices and energy production. But the enlargement of the IRS is, to put it in Bidenesque terms, a big freaking deal. Considering how fervently Democrats have clamored to increase funding and beef up enforcement at the tax agency, you might have expected the president to show a little more enthusiasm.

Or maybe not. Thanks to Biden and the Democrats, one of the most-hated federal bureaucracies is about to become much richer and stronger. With the bill safely passed and midterm elections looming, the White House now may be only too eager to stop talking about the IRS and change the subject.

But the supersizing of the IRS shouldn’t vanish from the spotlight just yet — not before the myths the administration relied on to justify it can be dispelled.

To begin with, there was the endlessly repeated claim that the tax agency had been crippled by “persistent budget cuts” and that a massive influx of new funds was needed just to make up for lost ground. Not true. As economist Dan Mitchell has pointed out, advocates over the past decade were able to argue that the IRS was starved by comparing its budget specifically with what it received in 2011, just after there had been a funding spike. But review the long-term data and it is clear that the IRS budget, adjusted for inflation, had roughly doubled since the 1980s. In 2021, the agency’s budget was $13.7 billion.

A related whopper was the one about all the money the IRS was unable to collect because it was too understaffed and technologically backward to keep up with sophisticated tax cheats. Much was made of the so-called “tax gap” — the difference, according to the Treasury Department, between the taxes owed and those actually paid. According to Charles Rettig, the Internal Revenue Service commissioner, the federal government is being “outgunned” to the tune of $1 trillion a year.

Only last September, however, the government gauged the annual tax gap at $600 billion. A few years before that, it was $441 billion. You don’t have to squint too hard to see a connection between the rising estimates of how many tax dollars go uncollected and the effort to lobby Congress to pass the rich new bill.

In any case, far from declining in recent years, federal tax revenues have been a gushing torrent. In 2021, the government banked a record-high $4.05 trillion. That represented a one-year increase of more than 18 percent, the steepest in more than four decades. Even before passage of the new law, Americans were sending money to the IRS at record-busting levels. By 2027, federal tax receipts were projected to hit an unheard-of $5.7 trillion. Without new IRS agents.

Now, as the agency prepares to hire thousands of additional enforcement personnel, there’s little doubt that even more revenue will be extracted from American taxpayers. While some of the $80 billion going to the IRS under the new law is intended to improve general operations and a small sliver is earmarked for enhancing taxpayer services (like answering the phones), the lion’s share of the new funding is designated for enforcement. That means more lawsuits, more criminal referrals, more investigations — and more audits.

Which brings us to the most far-fetched claim of all: the promise, repeated by the administration over and over, that the IRS will not unleash hordes of new tax auditors on Americans who earn less than $400,000 per year.

At a press briefing a few days before the bill was signed, White House spokeswoman Karine Jean-Pierre kept insisting that the IRS would not be going after anyone making less than that amount. “This only will apply to those earning over $400,000… . [A]udit rates will not rise relative to recent years for households making under $400,000… . This is not about folks who make less than $400,000.”

Similarly, Treasury Secretary Janet Yellen avowed in a letter that “small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited.” This, she wrote, was “contrary to the misinformation from opponents of this legislation.”

But no such assurance was included in the legislation itself. When a Republican amendment was offered on the Senate floor to bar new audits from targeting under-$400,000 households, every Democrat voted against it. That is because the primary targets of the bigger, badder IRS will be taxpayers making $400,000 or less. They have to be. They have the money.

Americans who earn above that threshold account for less than 2 percent of taxpayers and earn about 25 percent of the nation’s income. By contrast, the overwhelming majority of income is earned by middle-class Americans making less, often considerably less, than $400,000. It is on them that IRS enforcement is focused today; it is on them that IRS enforcement will be focused tomorrow. The Wall Street Journal, citing Congress’s nonpartisan Joint Committee on Taxation, notes that up to 90 percent of the taxes to be collected on “underreported” income will come from households making less than $200,000 a year. The ultra-rich certainly have a lot of money. But there are far fewer of them. And, of course, they can afford high-powered lawyers and accountants to defend themselves against IRS audits and litigation. The vast majority of middle- and upper-class taxpayers can’t.

To put it differently, there are 735 billionaires in the United States. Under the bill signed by Biden, the IRS will be hiring as many as 87,000 new employees. True, they won’t all be auditors. But you can do the math.

A more muscular, aggressive, predatory IRS is on the way, and if you think it won’t be interested in you because you aren’t rich, my advice would be: Think again. And be sure to save your receipts.

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