Increase in IRS agents won’t target middle-income taxpayers, says CBO

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WASHINGTON — High-income taxpayers will be hardest hit by a further increase in IRS funding, with only a “small fraction” of new revenue expected to be collected from those earning less than $400,000, the Congressional Budget Office said Thursday nonpartisan.

This assessment could be used by both Democrats and Republicans to bolster their claims about the $79 billion in additional IRS funding included in the package. major domestic policy bill that President Joe Biden signed into law this month.

The last

  • Biden has promised not to raise taxes on families or small businesses earning less than $400,000 a year.
  • The bill does not directly increase taxes for these employees, as it does for large corporations. But that includes new funding for the IRS, which has been battered by years of budget cuts that have crippled its enforcement abilities.
  • Republicans warn a beefed up IRS will unleash all its auditing power on hard workers, middle-class Americans.
  • Treasury Secretary Janet Yellen ordered that additional IRS resources ‘not be used to increase the share of small businesses or households below the $400,000 threshold that are audited from historical levels’ .
  • The IRS would still have to collect new revenue from these households that they wouldn’t have had audit rates continued to drop without the additional funding. But the CBO said the amount will be a small portion of the roughly $180 billion in additional revenue it expects the government will collect from 2022 to 2031.

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what will happen

Funding for the IRS in the Inflation Reduction Act will, by 2031, increase the IRS budget to about 10% more than its size in 2010, its most recent peak.

About 58% of the additional $79 billion going to the IRS is for enforcement: to collect some of the hundreds of billions of dollars in taxes the IRS estimates are due but unpaid. The rest of the funding is to be spent on improving taxpayer services, supporting operations, and upgrading technology and other systems.

What didn’t happen

Republicans tried unsuccessfully to ban the IRS from using any of the new funds to audit taxpayers with incomes below $400,000. That would have been more restrictive than Yellen’s directive that the IRS not increase audits for this group beyond historical levels.

The GOP amendment, which was defeated, would have raised the IRS about $4 billion less than the CBO projected for the enacted version. Had the amendment been included, the IRS would have had to shift to less productive enforcement activities and incur higher administrative costs, according to the CBO. Additionally, some taxpayers would likely have under-reported their income to fall below the $400,000 income threshold to reduce their chances of being audited.

Best takeaways

The CBO summarized the effects on taxpayers earning less than $400,000 as follows:

  • Audit rates will not continue to decline, so audit activity will be higher than it would have been without the budget increase.
  • Other enforcement mechanisms such as document matching, a tool to prevent under-declaration of income, will increase.
  • Voluntary taxpayer compliance will increase.
  • Increased funding for taxpayer services could lead to more accurate tax filings.
President Joe Biden signs the Cut Inflation Act in the State Dining Room of the White House on August 16, 2022.

What they say

  • “And I stand by my campaign pledge: No one — let me emphasize — no one earning less than $400,000 a year is going to pay a penny more in federal taxes,” Biden said when he signed the tax bill. reduction in inflation this month. .
  • “Families where every penny counts, they are crushed by inflation and rising fuel prices just to get to the store – they will bear the brunt of these new audits,” said Texas Rep. Kevin Brady, the biggest council tax republican. editorial board, said on Fox News.
  • “CBO anticipates that a portion of the increased revenue will be collected from taxpayers with incomes below $400,000; the amount will be only a small fraction of the total increase,” the nonpartisan office said in a letter to Brady and Rep. Jason Smith, R-Mo.

why is it important

Few federal agencies are as despised by the public as the IRS. Republicans are trying to score political points by raising fears of an overly aggressive tax collection system. They also accuse Biden of breaking his promise not to raise taxes on those earning less than $400,000.

Even if tax rates remain the same for this group, some will pay more than they would have without additional funding from the IRS to replace years of budget cuts. But it is a small part of the amount intended to reduce the gap between what is owed and what the government collects.

Reality check:Biden wants to give the IRS more money to chase down wealthy tax cheats. Will it work?

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