Don’t Believe the White House’s Promises About Who the New IRS Will Audit

As the House of Representatives, as early as this afternoon, prepares to give the Internal Revenue Service the biggest single funding boost in its history, top Democrats have been busy escalating their already implausible claims that goosing the IRS enforcement budget by 69 percent over a decade, hiring 87,000 additional new staffers at an agency that currently employs 79,000, and nabbing an estimated extra $124 billion in tax revenue will miraculously not bring any percentage increase in audits performed on Americans earning less than $400,000 a year.

“Contrary to the misinformation from opponents of this legislation,” Treasury Secretary Janet Yellen wrote in a letter to IRS Commissioner Charles Rettig Wednesday, “small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited.” Rettig had echoed the language of his boss in a letter of attempted reassurance to the Senate on August 4, albeit with more wiggle room (italicized):

“These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans. As we’ve been planning, our investment of these enforcement resources is designed around the Department of the Treasury’s directive that audit rates will not rise relative to recent years for households making under $400,000.”

As Yellen’s more assertive guarantee—reiterated for emphasis by the White House press shop Thursday—indicated, the Biden administration is getting a bit jumpy about criticism that a reenergized IRS will make life more unpleasant for the voting non-rich.

Asked repeatedly about the enforcement boost Tuesday, White House Press Secretary Karine Jean-Pierre insisted that “it will only apply to those earning over $400,000,” that “this is not about folks who make less than $400,000,” and that the answer to whether there will be new audits on anybody making less than that was: “No. Very clear, no.”

As Liz Wolfe has reported repeatedly in the pages of Reason, none of these assurances live in the text of the Inflation Reduction Act (IRA) itself. One Republican amendment “to prevent the use of additional Internal Revenue Service Funds from being used for audits of taxpayers with taxable incomes below $400,000” was voted down on party lines. You’ll just have to take Democrats’ word for it.

That’s good enough for many news organizations, who have been coughing up “fact-checks” aimed not at the demonstrable veracity of White House promises about significant legislation impacting literally all adult Americans but at the hyperbole of Republican criticism thereof.

“The Treasury says it will hire experienced auditors and workers who will improve taxpayer services, and that audit rates for those earning less than $400,000 are not expected to rise in relation to historic norms,” the Associated Press relayed in one such exercise Wednesday.

Abetted by a willing media, the executive branch has gone on the offensive against people who are more credulous about such claims. “It is wholly inaccurate to describe any of these resources as being about increasing audit scrutiny of the middle class or small businesses,” Natasha Sarin, a Treasury Department tax policy specialist, told Time magazine in a particularly loaded fact-check Tuesday.

Not content with hard-to-believe vows that audits on the non-rich won’t increase, the Treasury Department went the extra mile this week and floated the absurd notion of a decline. From a CBS News piece Thursday:

Households earning less than $400,000 “will likely see the chance of an audit decline,” Treasury said in a statement. “Instead, new funding will crack down on tax evaders among the wealthy and large corporations, invest in technology upgrades that help taxpayers, and hire more customer support staff to prevent backlogs.”

If we take Yellen at her word that “households earning $400,000 per year or less will not see an increase in the chances that they are audited,” what would that look like numerically? According to a Government Accountability Office report released in May, in the 2019 tax year (the last for which complete data was available), there were 147,252,000 tax returns filed by people earning $200,000 or less, 359,000 of which got audited. That’s around one out of every 400.

There are at least three good reasons to suspect that, despite this week’s aggressive official insistence to the contrary, the rate of IRS audits performed on the under-$400,000s will be higher than one out of every 400.

1) The Congressional Budget Office (CBO) predicts so. In a September 2021 letter, CBO Director Phillip L. Swagel estimated that boosting IRS funding by $80 billion would increase tax revenues by $200 billion (the number would later rise to $207 billion, before settling at $204 billion), adding that “the proposal…would return audit rates to the levels of about 10 years ago; the rate would rise for all taxpayers” (italics mine), though “higher-income taxpayers would face the largest increase.”

This remains the CBO prediction, which otherwise Democrats are happy to tout for the $204 billion revenue increase and $124 billion net reduction to the deficit ($204 billion minus the $80 billion cost). Some news organizations have confused those two different numbers for being two different scores, using the delta to dampen criticism that audit rates will rise for everyone. For instance, PolitiFact this week:

[Rep. Kevin] Brady [R–Texas]…failed to note a key difference between the CBO assessment from a year ago and the bill under consideration today. The CBO assumed in its report that $60 billion of the $80 billion would go toward enforcement. But the current bill would result in substantially less than that—$46 billion—for enforcement, according to a Congressional Research Service analysis. With nearly a third less money, the number of resulting audits likely would also be less than one would expect based on the CBO report.

This description misstates what Swagel said. The CBO did not assume that $60 billion of the $80 billion increase “would go toward enforcement,” it assumed that “about $60 billion would be for enforcement and related operations support.” (Italics mine.) In the final IRA bill, in fact, $45.7 billion is earmarked for “enforcement,” and $25.3 billion goes to “operations support.” There is no reason to conclude from those dollar amounts that the number of resulting audits will be less than originally projected.

In a statement to Washington Post fact-checker Glenn Kessler, who is consistently the best in his fallen field, the CBO tried to de-emphasize Swagel’s audit numbers:

“The statement about the effect on taxpayers in the September 2021 blog post was intended to place the magnitude of the funding change into context rather than as guidance as to how one might predict a count of audits,” the CBO said, adding that it has not “provided an estimate of the number of audits that might result from providing additional resources to the IRS since such an estimate would be very sensitive to exactly how IRS utilized the additional funding.”

Given the consistency of the CBO’s revenue estimate over time, however, it’s hard to imagine the agency’s original assumptions changing much. Kessler, for what it’s worth, concluded that the GOP’s “math adds up” when it comes to the increase in audits at various income levels, just that “these numbers lack important context.”

2) The “tax gap” that the IRS seeks to close includes large amounts from the under-$400,000 club. The Joint Committee on Taxation (JCT), the bipartisan congressional body that reports on the distributional effects of taxation, calculated one year ago that $68 billion of the estimated $245 billion annual in underreported individual income tax revenue between 2011 and 2013 originated from sole proprietor businesses that report to the IRS using Schedule C.

“More than half of the assessed amounts are estimated to come from taxpayers with reported income between zero and $50,000,” the JCT found.

More controversially, in a July 29 assessment, the JCT estimated that those earning less than $200,000 per year will see a combined tax increase in 2023 of $16.7 billion, which flies in the face of the Biden administration’s repeated promises to the contrary. But the White House counters that the JCT figures don’t account for cost-savings that the middle class will enjoy thanks to the Inflation Reduction Act.

The fact remains that you can’t close the tax gap without greater enforcement on the poor and that enforcement on the poor is considerably less expensive. This helps explain why the auditing rates of different income levels tend to look like a barbell—bigger at each end, thinner through the broad middle.

It is true that Yellen has freshly directed the IRS to not increase the audit rate of under-$400,000s. And it’s also true that there’s no structural enforcement mechanism preventing the agency from continuing to go after low-hanging fruit to meet revenue targets. Or, in the memorable words of PolitiFact, “There’s no guarantee that the agency will adhere to the new policy it has announced, but there’s no guarantee that it won’t.”

3) The Biden administration keeps wiggling when confronted with criticism about beefed-up enforcement. Reading the White House and Treasury Department respond to worries over increased audits, you’d think that much of the $80 billion was going toward customer service.

“We are the greatest country in the world, yet the agency that touches more Americans than any other continually struggles to receive sufficient resources to fulfill its important mission,” lamented IRS Commissioner Rettig in his questionably worded letter to the Senate. “The resources in the reconciliation package will get us back to historical norms in areas of challenge for the agency—large corporate and global high-net-worth taxpayers—as well as new areas like pass-through entities and multinational taxpayers with international tax issues, where we need sophisticated, specialized teams in place that are able to unpack complex structures and identify noncompliance…. Other resources will be invested in employees and IT systems that will allow us to better serve all taxpayers, including small businesses and middle-income taxpayers.”

In fact, just $3.2 billion of the $80 billion is earmarked for customer service, producing a mere 9 percent increase over the previous baseline. If the agency is bad at answering phone calls—and it’s bad at answering phone calls—a 9 percent bump seems inadequate to the task.

The agency has tried gamely to make the 87,000 hiring number seem less scary, insisting (as the White House did Thursday) that “the IRS would need to hire 52,000 people over the next six years just to maintain current staffing level to replace those who retire or otherwise leave.” An employee attrition rate of two-thirds over just six years seems a tad on the exaggerated side.

Running away from the plain fact that the bulk of this money is being spent on boosting enforcement and that the goal is to squeeze an extra $48 billion a year from American taxpayers amounts to a panicky acknowledgment that one of Democrats’ main funding mechanisms for their ambitious domestic agenda is inherently unpopular. Luckily for them, the question will lose its escalatory urgency as soon as this afternoon. Unluckily for the rest of us, that’s when the squeeze is almost certain to begin.

BONUS LINK: Hear me jabber about taxes on The Reason Rundown With Peter Suderman.

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