Speaking to the Senate Finance Committee earlier this year, IRS Commissioner Daniel Werfel sought to allay fears that increased IRS funding would result in a dramatic increase in audits of small businesses and middle-class taxpayers. The audit rates from 2018 will be used as the benchmark, he said, and that was a historic low point for audits of taxpayers with less than $400,000 of income. In 2011, the audit rate for this group was one in 116. After the controversy about IRS audits of conservative political groups, the agency’s budget was flat for several years. The audit rate for the under-$400,000 group fell to one in 222 in 2017, and one in 301 in 2018.
The audit priority for the IRS instead will be 390,000 high-income individuals, corporations and complex partnerships. Tax returns for some in this group can run to 100,000 pages, and the IRS has only 2,600 enforcement personnel to deal with them. The Service needs more accountants, lawyers, and data analysts to adequately assess these complicated tax returns. According to the IRS plan, an additional $4.3 billion will be spent on enforcement in 2027. Before that, the IRS is upgrading taxpayer services and its aged computer systems. Some $1 billion per year for three years will be spent on new computers beginning in fiscal year 2024.
The IRS received much criticism for poor taxpayer service in the 2022 filing season. Only 15% of taxpayers trying to telephone the IRS reached an agent, and then after an average wait time of 27 minutes. The 2023 tax season went much better, Commissioner Werfel reported. The average wait time was cut to 4 minutes, and 87% of taxpayers were able to get an answer from an agent.
About half of the 504,097 audits in 2018 of returns with less than $500,000 of income were of returns with less than $25,000 of income. This was because of the high rate of errors and fraud in claiming the earned income tax credit, according to the IRS.
Commissioner Werfel concluded: “I just wanted people to realize that small businesses around the country—mom-and-pop shops, clothing stores, auto repair shops—they have nothing to fear in terms of a wave of new audits coming. It’s just not coming.”
Predictions are hard
When Congress is debating changes in the tax law, the effect of each change is evaluated by a bipartisan committee. Typically, any new tax break needs to be offset by a tax increase somewhere else, so as to not worsen the federal budget deficit.
For example, in August 2022, the Joint Committee on Taxation scored the Inflation Reduction Act as increasing federal revenue by $90.7 billion from 2022 through 2031, the ten-year budget window. The projected cost of “green energy” energy incentives in the legislation was $205.2 billion during the same period. These would be offset by a variety of tax increases, including a new corporate minimum tax ($222 billion) and a new excise tax on repurchases of corporate stock ($73 billion).
Given the uncertainty of so many variables, including how taxpayers may respond to the changes in the tax law, such predictions are inevitably too high or too low. However, in April, only eight months after the JCT evaluation, the Congressional Budget Office released a new score on the cost of the energy provisions of the Inflation Reduction Act: $569.5 billion over ten years. It is unusual for projected costs to more than double in less than a year. What’s more, the new score means that the Inflation Reduction Act actually will increase the federal deficit substantially, rather than reduce it.
Republicans were upset by the news, but Senate Democrats were cheered by it. “I think it’s a positive thing,” said Senate Finance Committee member Sheldon Whitehouse of Rhode Island. “More credits means more investment, means more jobs, means smoother transition: It’s all good.”
No explanation was forthcoming as to why the JCT underestimated the costs of the energy credits so badly. The new information casts a cloud over the revenue projections that accompany debate over increasing the debt ceiling.
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