The official watchdog of the Internal Revenue Service admitted in a new report there is no realistic way to prevent the IRS from increasing audits on average Americans unless the agency takes immediate action.
What is the background?
Last year, the Inflation Reduction Act — which was not actually designed to reduce inflation — gave the IRS $80 billion in new funding. That funding would be used to hire 87,000 new agents over the next decade and to increase tax enforcement.
In response to criticism from Americans of all political views, the Biden administration promised that none of the money would be used to increase the number of audits on American households or small businesses earning less than $400,000 per year.
What did the TIGTA say?
The Treasury Inspector General for the Tax Administration, the official IRS watchdog, said in a report dated Aug. 31 the IRS cannot fulfill its promise, in part, because the agency defines high-income taxpayers as those earning more than $200,000 of total positive income per year.
“There is no way to identify the complete population of taxpayers that meet the criterion of $400,000 or more specified by the current Treasury Secretary,” the report explains.
The $200,000 threshold for high-income earners was set in 1976. When adjusted for inflation, that threshold would be more than $1 million today. Because of this issue, the TIGTA recommended the IRS establish a definition of high-income taxpayers in compliance with its promise. But the agency refused and cited concerns of “agility.”
The IRS told the TIGTA:
The IRS disagreed with this recommendation. It asserted that a static and overly proscriptive definition of high-income taxpayers for purposes of focusing on income levels above which taxpayers have unique and varied opportunities for tax would serve to deprive the IRS of the agility to address emerging issues and trends.
The motive for hiring more IRS agents was to increase tax enforcement against wealthy Americans who use the extensive tax code for their benefit.
Definition problems aside, the TIGTA report said that increasing enforcement on wealthy Americans will be difficult because the agency does not have enough agents who know how to parse the financial data of high-income taxpayers.
Importantly, the TIGTA found that audits of high-income taxpayers, no matter the definition, have not yet increased.
“Our analysis disclosed no significant increase in the number of high-income individual return audits,” the report said.
“[D]espite congressional encouragement to examine individual high earners and the former Treasury Secretary’s directive, most examinations were not focused on high-income taxpayers,” the inspector general emphasized.
Therefore, at present, the TIGTA said, “[W]e see no direct effort to increase examinations of individual high earners.”
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