Taxpayers brace for ‘supercharged’ IRS under Dems’ budget plan

The IRS is about to get a lot more nosy.

If Democrats succeed in passing their new climate and budget package this month, it will add some $80 billion to the IRS over the next decade, with the majority of that going to enforcement.

The result will be a “supercharged” tax agency with roughly 65% more funding to investigate, audit, talk to and collect from Americans.

“Despite a long history of IRS abuses, Democrats have revived their proposal to send 87,000 new IRS agents after you and your family-owned business on the belief that everyone is a tax cheat,” Republicans on the House Ways and Means Committee said this week.

One Republican analysis figures nearly half of the IRS’s new audit work will be aimed at taxpayers with incomes of $75,000 or less.

Democrats insist that’s not their goal.

They say they want the agency to have enough resources to make filing easy for honest taxpayers and to make life tougher for high-income cheats who every year deprive Uncle Sam of hundreds of billions of dollars in owed payments.

Democrats even wrote language into their bill that appears to be aimed at discouraging audits of those with incomes of less than $400,000 a year.

Taxpayer advocates said it’s too early to say who’s right.

Because Democrats are trying to push through the changes via the budget process, they can’t be as specific about how they want the IRS to spend the money. Democrats tried to hedge their bet by adding language that appears intended to discourage audits for those with incomes of less than $400,000, but that language lacks teeth.

“It really comes down to how they implement this,” said Steve Ellis, president of Taxpayers for Common Sense.

Mr. Ellis said the IRS has been starved for cash for years and needs more money to help the agency deliver basic services, including answering customer calls. He said better enforcement encourages people to comply and builds confidence in the system by assuring honest taxpayers that their neighbors aren’t getting away without paying what they owe.

Audit rates have been plummeting for years. In 2010, nearly 1% of individual filers were audited. By 2019, it was just a quarter of a percent. Audit rates for those with incomes of $10 million and more tumbled from 21.2% to just 3.9% over the same period, the Government Accountability Office said in a report earlier this year.

Tax experts said the IRS relies on voluntary compliance and the belief that an audit is a real possibility is a way to improve compliance.

Giving the IRS such a large infusion of cash makes it more likely that the agency can go after the high-dollar cheats than if the investment had been smaller, Mr. Ellis said. That’s because it takes significant money and manpower to conduct the complex audits required for higher-income cheats, and giving enough resources makes that an easier lift.

“It’s the people with more exotic incomes that are more likely to be using abusive tax shelters and get creative, but those are much more complex audits. Having that investment means you can do more of these complex audits,” Mr. Ellis said.

Pete Sepp, president of the National Taxpayers Union, doubted the IRS could spend all the new money on those with higher incomes. Glancing over the latest numbers from 2019, he said slightly more than 2 million returns were filed at $500,000 income or higher.

“I mean, are they going to have a 100% audit rate on the individual side? It seems almost physically impossible to spend that much money doing audits,” he said.

He doubted that Democrats’ attempt to hold harmless those making less than $400,000 will persist. In particular, Mr. Sepp predicted that any tactics the IRS develops for auditing and collecting from top-level earners will bleed down to lower-income levels.

“What they will likely see over time is all kinds of audit techniques that were once reserved for the wealthy and were sharply honed by this additional funding eventually coming around to infect all types of audits for all types of people,” Mr. Sepp said.

He said he supports better compliance. Like Mr. Ellis, he said the IRS does need new funding. Still, he said, tax pros know the best bang for the buck comes from education and helping taxpayers get their obligations right on the front end rather than chasing the money on the back end.

That’s particularly true now with pathetic IRS customer service. The agency began the 2022 tax year with millions of returns still unprocessed from 2021.

Mr. Sepp said no retail business would be allowed to keep that sort of customer service while stepping up enforcement.

“People can’t even check out at the cash register, but their first thought is to increase the number of security guards around the store and search the wallet of everybody coming into the store,” he said.

As drafted, the bill worked out by Sen. Joe Manchin III, West Virginia Democrat, and Senate Majority Leader Charles E. Schumer, New York Democrat, includes $45.6 billion for stiffer enforcement, covering audits, investigations and collections, asset monitoring and motor vehicle purchases; $25.3 billion for operations, including facilities, postage, technology and research; $4.8 billion for modernizing technology; and $3.2 billion for taxpayer services such as education and filing assistance.

Democrats say the roughly $80 billion investment over the next decade will produce more than $200 billion in new revenue — for a net return of $124 billion.

The Democrats’ bill also envisions very specific tax increases and new drug-pricing powers for Medicare. Combined with the new IRS enforcement, they are expected to bring in $739 billion over the decade.

Of that, about $370 billion will go to Democrats’ climate change and energy policies and another $64 billion will be spent on short-term Obamacare subsidies. The remaining income would cut into looming deficits, Mr. Manchin said.

Democrats are desperate not to be seen targeting those on the lower range of income with any of the tax provisions, and indeed a debate has raged in recent days about who is likely to face audits.

Republicans on the Senate Finance Committee released an analysis arguing that a “significant” amount of unreported income comes from bad filings on business or other income-producing activities, and perhaps three-quarters of enforcement actions in those areas hit filers who make less than $100,000.

They will now face a new “army of IRS auditors” poring over their books, the Republicans said.

Other analysts said they expect the “working rich” — those who own several restaurants or lead good medical practices — to be the chief targets. Anyone in the truly wealthy range has an army of accountants and attorneys working on their behalf to avoid taxes, but the working rich do not.