Yellen Orders IRS Not to Ramp Up Middle-Class Audits

Yellen Orders IRS Not to Ramp Up Middle-Class Audits

REUTERS/Gary Cameron

Treasury Secretary Janet Yellen has directed the Internal Revenue Service not to increase its audit rate on households earning less than $400,000 per year.

In a letter to IRS Commissioner Charles Rettig dated Wednesday, Yellen said that “much-needed funding” that will flow to the tax agency as a result of the Inflation Reduction Act — about $80 billion over 10 years, assuming the bill passes the House later this week as expected — will be used “to improve taxpayer service, modernize outdated technological infrastructure, and increase equity in the tax system by enforcing the tax laws against those high-earners, large corporations, and complex partnerships who today do not pay what they owe.”

She also said that not increasing the audit rate on households earning less than $400,000 (a group that sometimes passes for middle-class in Washington) has been “a guiding precept” for the IRS as it plans how to spend the additional funding it expects to receive in the coming years, including roughly $45 billion designated for enforcement.

The IRS plan: “Specifically, I direct that any additional resources—including any new personnel or auditors that are hired—shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels,” Yellen wrote. “This means that, contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited.”

Instead, Yellen says that additional enforcement capabilities will focus on “high-end noncompliance,” which requires far more time and attention than that given to typical middle- and working-class tax returns. “This is challenging work that requires a team of sophisticated revenue agents in place to spend thousands of hours poring over complicated returns, and it is also work that has huge revenue potential: indeed, an additional hour auditing someone making more than $5 million annually generates an estimated $4,500 of additional taxes collected,” she wrote.

Ultimately, it means that average taxpayers will face less scrutiny, Yellen said. "For regular taxpayers ... the result of this resource infusion will be a lower likelihood of audit by an agency that has the data and technological infrastructure in place to target enforcement resources where they belong—on the high end of the income distribution, where the top 1% alone is estimated to not be paying $160 billion in owed taxes each year,” Yellen wrote. “That’s important as a matter of revenue-raising, but it’s also essential as a matter of fairness.”

Responding to wild claims: The move comes amid grossly exaggerated claims by Republicans that the IRS will use its additional funding to harass middle-class households and small businesses with a “new army of 87,000 IRS agents,” as House Minority Leader Kevin McCarthy (R-CA) put it earlier this week, using language that is popular within the GOP. While unlikely to quell what appear to be politically motivated attacks, Yellen’s letter does add to the pile of documents attempting to refute Republicans’ anti-IRS fear-mongering.

Evaluating McCarthy’s claim about that terrifying IRS army, Washington Post fact checker Glenn Kessler gave the GOP leader a three Pinocchio rating – meaning the statement is “mostly false.”

The 87,000-person force will not be appearing on the horizon any time soon – in fact, it is unlikely ever to assemble. The figure is drawn from a year-old Treasury report that estimates that the IRS could use extra funding to hire about 7,000 to 12,000 people per year to make up for the many cuts in personnel over the last decade, as well as to fill in for the many IRS employees who will be retiring. Kessler notes that more than half of the IRS’s 82,000 employees — a total of 50,000 workers — will be eligible to retire in the next five years.

On top of that, there is no concrete plan to hire 87,000 people, with that number being just a rough estimate. And whatever new hires the agency does make, many won’t be auditors and instead will be focused on implementing new technology and improving customer service.

Rep. Gerry Connolly, a Democrat from Virginia, put it in more direct terms, however partisan, framing the new funding as a necessary part of rebuilding the tax agency. “You are being lied to. There's no army of 87,000 new IRS agents. It's made up,” he wrote on Twitter. “The GOP hollowed out the IRS & slashed its budgets. Rich tax cheats run wild, meanwhile you can't even get someone from the IRS on the phone. We are restoring the agency so it actually works for you.”