Did a shiver go down your spine when you heard that Congress is pouring a whopping $80 billion into the Internal Revenue Service over the next 10 years to beef up the nation’s tax collection system?
To borrow from President Reagan, among the most dreaded words in the English language are: I’m from the IRS and I’m here to audit your taxes.
But, hard as it may be to believe, all that new money is almost certainly good news. It doesn’t mean the tax cops are more likely to be on your tail.
In fact, it might make the whole business of paying your taxes easier and better, maybe even reduce the amount all of us have to pay.
But doesn’t this mean I’m more likely to be audited?
To begin with, the IRS has never spent a lot of time tormenting the average American to squeeze out a few more nickels and dimes for Uncle Sam.
The vast majority of taxpayers — 9 out of 10 — don’t itemize any deductions, and so stand almost no chance of being contacted by the IRS, except maybe for an arithmetic mistake.
And among those who do itemize their deductions on what was once referred to as the long form, relatively few will ever be picked out by the IRS computers for further inspection.
If that isn’t enough to ease your mind, Treasury Secretary Janet Yellen has said the IRS won’t increase audit rates for individuals or small businesses with incomes of less than $400,000.
So if not me, who are they coming after?
The answer to that is a little like what the notorious bank robber Willie Sutton is supposed to have said when somebody asked him why he robbed banks: “Because that’s where the money is.”
Contrary to what politicians sometimes say, those bureaucrats in Washington are not dumb. The IRS’ assignment is to collect all the money Washington is entitled to under existing law. So, like Sutton, they go where the money is: the very high-income individuals, partnerships and corporations.
Those taxpayers also have batteries of lawyers and accountants to help them slip around the rules in ways that only equally skilled IRS experts can combat.
The nonpartisan Congressional Budget Office estimates that the new funds will enable the government to collect about $180 billion over the 2022-2031 period.
How come the IRS has been letting all that money get away?
Well, they’ve been trying. But there just aren’t enough of them. For years, Congress has been cutting back and underfunding the IRS.
Most of the cutting has been pushed by Republicans. But some Democrats have joined in, too; after all, they also depend on rich campaign donors.
As the IRS purse strings tightened, the U.S. economy grew, and rich taxpayers and big corporations got richer and more skilled at gaming the massive and complex tax code.
Some of the biggest, most profitable American corporations pay no U.S. income taxes at all.
In 2021, Congress appropriated $12.5 billion for the IRS, which was about 25% less than in 2010, after adjusting for inflation.
It looks even worse when you consider the increase in the volume of work over the years — the number of individual tax returns filed in 2021 reached 168 million, up 15% from 2011.
Meanwhile, IRS employment has been steadily declining. Last year the IRS employed about 79,000 regular full-time workers, down from almost 95,000 a decade earlier.
The falloff was even higher for IRS employees involved in examinations and collections.
The result: a 70% drop in audits in 2019 compared with 2010. And guess who saw the biggest decrease in audits? Those with incomes of $200,000 or more, said the U.S. Government Accountability Office.
I should feel sorry for the IRS?
Well, beyond the IRS’ reduced ability to pursue big tax cheaters, the budget-cutting has hurt the rest of us, too. The number of customer service reps fell 30% during the past decade.
Anyone who’s tried to call the IRS for help knows how frustrating that has been.
In the most recent filing season, IRS employees answered less than 15% of calls from taxpayers, said a senior Treasury official.
It hasn’t helped that the agency has such outdated information technology systems that it sometimes uses a 1960s-era computer language for data processing and stores information on magnetic tapes in warehouses.
And a lot of taxpayers, and not just those who file with paper forms instead of electronically, have to wait while their returns are hand-typed into the IRS system — with all the wasted time and opportunities for typing mistakes that entails.
“It’s shocking that our tax authority in the United States is so reliant on paper,” said Lisa De Simone, accounting professor at the University of Texas.
Although most of the new funding will go toward enforcement, tens of billions will be used to upgrade telecommunications and IT systems. All of that should make the IRS more responsive.
Tax returns should get processed faster, too, meaning more people can expect to get refunds sooner. And, once new investigative technologies and asset-monitoring systems are in place, the IRS should be better able to identify the gaps and sharpen their audits.
How much more money does the government stand to collect?
Experts say the tax gap — the difference between taxes owed to the government and what’s actually collected — is at least around $600 billion a year.
Just how much can be found will depend on the IRS’ ability to hire many more skilled people.
For years, a paucity of enforcement resources made it difficult to go after the big fish, who can hide their income in foreign banks or through multilayered partnerships. That takes a lot of manpower and time to investigate, with no assurance that IRS agents will be able to disentangle and ultimately extricate the taxes owed.
Instead, in recent years, auditors often went after easier pickings, none more low hanging than taxpayers claiming the earned income tax credit.
The EITC is a tax break for low- and moderate-income workers and families. Returns claiming the credit have a relatively high rate of fraud and errors, like improperly claiming a qualifying child or misreporting income. And the IRS has a solid track record in collecting these additional taxes.
In sheer volume, the agency success rate for these types of audits looked good.
“The returns on doing these are very high” in terms of effectively and efficiently demanding compliance, said Richard Prisinzano, a former veteran of the Treasury Department’s Office of Tax Analysis now at Penn Wharton Budget Model, a think tank.
But the amount of tax money collected in each EITC audit is usually very small. And, as Prisinzano noted, it distracted agents from working on more difficult cases with much bigger tax revenues at stake.
Will the IRS really hire an ‘army’ of new agents?
GOP lawmakers and other anti-tax critics have claimed that the new funding means the IRS will more than double its force by adding 87,000 people.
Republicans have used inflammatory rhetoric to falsely claim the IRS plans to arm its auditors with weapons.
Sen. Ted Cruz (R-Texas) compared the new hires to a “shadow army” that will “hunt” taxpayers. Sen. Charles E. Grassley (R-Iowa) described a “strike force that goes in with AK-15s already loaded, ready to shoot some small-business person.”
The reality is, less than 3% of IRS employees carry firearms. But thanks to the GOP attacks, the agency announced it would need to bolster security to protect its workers amid a rise in threats against its offices.
As for the 87,000 number, that came from a 2021 Treasury report estimating how many full-time employees that $80 billion could pay for over 10 years.
Truth is, the IRS will have a hard enough time just to maintain its current staffing level.
The agency’s workforce is older than average for government workers; more than 50,000 employees are expected to retire in the next few years, said IRS Commissioner Charles Rettig. It won’t be easy to replace them, let alone expand its staff with top-notch investigators.
“When you’re looking at the rich and corporations, and you’re looking at opaque and complex structures, how much can be found will turn on the quality of the agents,” said Steven Rosenthal of the nonpartisan Tax Policy Center.
“The IRS will need to attract, train and retain very sophisticated help. And that’s hard,” he said, “because the IRS cannot compete with the finances of the private sector” in terms of pay.