This post was guest authored by Maria Jose Pereira Gonzalez.
The Inflation Reduction Act (IRA), signed into law by President Biden in August 2022, provided the Internal Revenue Service (IRS) with approximately $79.4 billion in supplemental funding. After being underfunded for decades, this money starts to help the agency go after wealthy tax cheats, improve taxpayer services, and modernize computer systems.
This sorely needed infusion of resources is already paying dividends. The IRS has identified 1,600 taxpayers who reported over $1 million in income and owed more than $250,000 in recognized tax debt, each! In just a few months, the agency has reportedly collected $160 million from millionaires who had not paid their outstanding debt.
In September, the agency announced the creation of a new pass-through group that will focus on high-income earners. The pass-through group, backed by the IRA funding, is composed of a team of specialists with in-depth knowledge of complex tax structures, financial dealings, and offshore assets frequently employed by the super-wealthy. It isn’t just another division within the IRS; it represents a heightened initiative to seal tax loopholes and guarantee adherence from the highest income brackets.
The 2023 filing season also saw huge improvements to IRS customer service. In 2022, the average phone wait time was 27 minutes, and only 13% of the people who called the agency managed to talk to a live person. This year, the phone wait time was cut to 4 minutes, and 87% of the callers got through, surpassing the 85% goal set by Treasury Secretary Janet Yellen.
Until this infusion of resources, the IRS had to manually enter the numbers from paper returns into its computers, digit by digit. With the introduction of advanced scanning technology, the agency was able to digitally process 80 times more returns in the initial quarter of 2023 than it did throughout the entire year of 2022. Digitization can also improve IRS service as a whole by reducing human errors and storage costs, and freeing up resources that can be redirected to further improve customer service.
The IRS has also introduced new online filling options. In February, the agency launched the Paperless Processing Initiative by giving taxpayers the option to respond online to nine of the most frequently issued notices. The agency aims to provide taxpayers with the option to e-File 20 additional tax forms by the start of Filing Season 2024.
But IRS funding is under threat, again. As part of the deal struck by President Biden and then-Speaker Kevin McCarthy in May to raise the debt ceiling, $1.4 billion of the $79.4 billion of the IRS’s new funding was immediately rescinded. A separate “handshake deal” between the two, not codified into law, committed Congress to later rescinding another $20 billion from the IRS in exchange for transferring it to other domestic funding priorities. Within weeks of making this deal, however, House Republicans walked away from it, and began drafting appropriations bills that would both cut the agreed-to spending for domestic priorities and rescind $67 billion (not $20 billion) from the IRS. In response, advocates have urged Congress to reject any additional cuts to the IRS, including those from the handshake deal.
IRS budget cuts have real consequences for taxpayers and our federal government. Cuts can lead to a reduction in IRS workforce and a decline in customer service quality. They can also lead to a sharp decrease in audit rates, in particular those targeting the ultra-wealthy. As a result, the tax gap, which is the difference between owed and paid taxes, has become a substantial issue. The most recent IRS estimate is that taxpayers failed to pay a record of $688 billion in taxes in the 2021 tax year, and top earners were responsible for a disproportionate share of that gap. It’s worth noting, the IRS has said it will “ensure audit rates do not increase for those earning less than $400,000 a year.” In essence, taking resources away from the IRS is an effective way to redistribute money to the wealthy and corporations.
Fully funding the IRS so that it can go after wealthy tax cheats, improve taxpayer services, and modernize computer systems will help apply our current tax laws more fairly. And resourcing the IRS is not just about making the wealthy pay their fair share. Unfortunately, the more strapped the IRS is, the more likely auditors will focus on those easier to audit because they don’t have expensive attorneys to challenge them. The IRS has an ugly history of auditing low-income and Black people at disproportionately high rates, in part because it costs more in staff time and resources to audit wealthy taxpayers, whose returns are more complicated than the average filer and whose lawyers make holding them accountable an expensive hassle.
In fact, an independent analysis of audit rates from Americans for Tax Fairness revealed that in 2020, the last year of the Trump Administration, the IRS audited low-income workers receiving the Earned Income Tax Credit (EITC) at a higher rate than millionaires for the first time in history. One explanation for the high number of audits on EITC recipients is ease. EITC audits are conducted through the mail and are far less complicated than audits of high-income taxpayers. A ProPublica investigation found a correlation between counties with the highest audit rates and the concentration of EITC recipients. Consequently, the IRS focused more on counties that were “poor, rural, mostly African American and in the South.”
But a recent investigation revealed that despite the higher initial costs associated with auditing the wealthiest individuals, the audits on wealthy individuals more than pay for themselves – for every additional $1 spent on auditing taxpayers above the 90th income percentile, more than $12 were generated in revenue. And in May 2023, IRS Commissioner Daniel Werfel told the Senate Finance Committee that the agency will reassess its audit algorithms to address any racial biases.
As funding discussions persist, protecting and maintaining IRS funding is essential for sustaining progress, upholding tax integrity, actively eliminating anti-Black racism from the implementation of our tax policy, and ensuring the wealthiest tax cheats are made to pay their fare share.
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