Kevin McCarthy misleads about Build Back Better legislation and IRS audits

House Minority Leader Kevin McCarthy attacked the Build Back Better legislation in an overnight speech that included a critique of efforts to use the IRS to catch tax cheats.

McCarthy spoke for more than eight hours prior to the bill’s final Nov. 19 vote. The version that passed the House, which may be changed in the Senate, would spend $1.75 trillion over 10 years on clean energy initiatives, child care subsidies, extended child tax credits, paid family leave and hearing aids for Medicare beneficiaries. It would be partially paid for through additional taxes primarily aimed at wealthy taxpayers.

"If I sound angry, I am," McCarthy said.

One thing he was angry about is what he says the legislation will mean for IRS audits.

"If you or your family spends $28 a day — prepare to be under constant audit by the IRS," said McCarthy, of California. He also said that the IRS will "spy" on these Americans, a claim he has made before.

We found that the bill does not include the provisions McCarthy warned Americans about. The Treasury Department has put out a proposal aimed at wealthy tax evaders, but even if it were adopted, it wouldn’t have nearly as broad a reach as McCarthy said.

The bill includes about $79 billion over a decade for the IRS to strengthen tax enforcement and expand audits. The legislation states that "no use of these funds is intended to increase taxes on any taxpayer with taxable income below $400,000."

Michael Kaercher, a senior attorney advisor at the Tax Law Center at NYU Law, pointed to that language in the bill as well as other administration documents showing that the goal of the administration is to target the rich. 

The Treasury Department wrote in May that Biden’s "compliance proposals are designed to ameliorate existing inequities by focusing on high-end evasion. Audit rates will not rise relative to recent years for those with less than $400,000 in actual income."

"This funding will likely increase audit rates, but those increases will be directed to large corporations and high-income filers," Kaercher said. 

The Congressional Budget Office estimates that adding IRS staff would put audit rates back to where they were 10 years ago. Compared with the low rates today, "the rate would rise for all taxpayers, but higher-income taxpayers would face the largest increase," the CBO said.

The overall examination rate for individuals in fiscal year 2019 was 0.4%, a drop from 1.1% in 2010, according to a January 2021 report from the Congressional Research Service. The examination rate for individuals with $1 million or more in income fell from 8.4% in 2010 to 2.4% in 2019.

CRS found that a hiring freeze from 2011 to 2018 kept the IRS from bringing in new employees, and 45% of current employees are eligible for retirement over the next two years.

The Treasury Department said that the "tax gap" — the difference between taxes that are owed and collected — totals around $600 billion annually.

In October, McCarthy’s office criticized the administration’s plan to spot money that goes unreported to the IRS. The approach hinged on new monitoring of bank accounts. The Treasury Department said that banks would need to report the total amount deposited and the total amount withdrawn from any given account in the course of a year. The threshold for reporting would be $10,000.

"When you break down the $10,000 reporting threshold, all it means is that if you, on average, spend about $200/week, or to break it down even further, $28/day, President Biden and Democrats think that they deserve to snoop into your checking account," McCarthy said Oct. 23.

The first issue with McCarthy’s claim is that the proposal he objects to is not in the bill. Erin Hatch, spokesperson for the House Ways and Means Committee told us, "the bank reporting proposal was never a part of the House’s Build Back Better legislation, so it certainly wasn’t in the version that passed this morning."

Plus, Hatch said that new reporting requirements need to be passed by law. If the House didn’t include them in the Build Back Better bill, the IRS wouldn’t have the leeway to implement them on its own later on.

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To be sure, McCarthy was responding to an actual plan put out by the Treasury Department. The House vote didn’t advance it, but it does exist as a concept.

Still, McCarthy’s claim is wrong.

He said everyone who spends over $28 a day would be under "constant audit by the IRS."

Casey Schwab, professor of accounting at the University of North Texas, noted that there's a big difference between monitoring by the IRS and being audited.

"Most people think of an audit as hearing from the IRS, maybe getting a letter saying they owe money, or being told to come in for a meeting," Schwab said. "Information being reported to the IRS doesn’t imply that you will be audited."

As a practical matter, Schwab said, audits are labor intensive and it would take more than simply spending $28 a day to trigger one. The Congressional Budget Office said that an audit of "medium complexity" takes about two years. Under any scenario, the agency has to be selective.

McCarthy’s statement also skips over the people the IRS would screen out.

The Treasury Department said that in order to focus on income that might go unreported, it would filter out people whose income is reported through their employer, as well as recipients of government benefits.

"For American workers and retirees, the IRS already has information on wage and salary income and the federal benefits they receive," the department said Oct. 19.

The Treasury Department press office told PolitiFact that a taxpayer would be flagged only if the outflow from an account was at least $10,000 more than the person’s income. So, in McCarthy’s terms, that would mean someone who spends $28 a day above what they earn in a day. And, they’d have to do that every day, not just the occasional splurge.

Some people might do that, but it would not equal everyone who spends $28 a day.

That said, about 27 million independent contractors and self-employed workers wouldn’t be covered under this approach.

McCarthy said, "If you or your family spends $28 a day — prepare to be under constant audit by the IRS." 

What McCarthy is suggesting isn’t in Build Back Better. McCarthy is criticizing a different proposal, but he leaves out many key details.

Such a plan would require new legislation to move forward. MCarthy’s claim ignores that the proposal aims to filter out people who get paid through an employer, or through a government program like Social Security. He treats audits as if they were the same as monitoring by the IRS, and they are different. 

The claim is not accurate. We rate it False. 

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