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• Focusing audits on high-income taxpayers wasn’t written into the Inflation Reduction Act.
• However, top Treasury and IRS officials have consistently confirmed that the new resources allocated to the IRS under the law will be focused on audits of the highest-earning Americans, which makes it stated government policy.
Since the Inflation Reduction Act passed with only Democratic support in Congress, Republicans have criticized the bill, saying it will saddle ordinary Americans with increased audits by the Internal Revenue Service.
The legislation, signed into law by President Joe Biden on Aug. 16, includes provisions that would lower drug costs, address climate change, reduce the deficit, and impose higher taxes on the largest corporations.
But much of the Republican criticism has focused on the law’s allocation of about $80 billion over 10 years to strengthen the Internal Revenue Service.
House Republican leader Kevin McCarthy, R-Calif., said that the "Democrats' new army of 87,000 IRS agents will be coming for you — with 710,000 new audits for Americans who earn less than $75k."
Sen. Joe Manchin, D-W.Va., sought to counter these attacks in an Aug. 28 tweet, saying, "The Inflation Reduction Act will ensure the wealthiest & most fortunate among us pay their fair share in taxes just like #WV families & small businesses. WV families making less than $400K & small businesses will NOT be targeted by the IRS because they are already paying taxes."
Manchin has a point. His argument is roughly the inverse of McCarthy’s, which PolitiFact rated Mostly False. We concluded that McCarthy’s 710,000-audit estimate runs counter to the IRS’ stated policy and was based on a flawed use of a Congressional Budget Office estimate that assumed much higher spending on enforcement than is in the legislation that passed. (We also found that McCarthy’s 87,000 figure was exaggerated because not all of those employees would be enforcement agents.)
Here, we’ll zero in on Manchin’s statement that "WV families making less than $400K & small businesses will NOT be targeted by the IRS."
The 710,000 figure stems from an exaggerated calculation by U.S. Rep. Kevin Brady of Texas, the House Ways and Means Committee’s top Republican. He arrived at the number by bringing together two pieces of data.
In 2021, the Congressional Budget Office said that $80 billion more for the IRS would "return audit rates to the levels of about 10 years ago."
Brady took 2010’s audit rates and applied them to the number of tax returns in 2018, broken down by income groups. Using his approach, there would be about 710,000 more audits for filers reporting less than $75,000 in income.
However, this approach ignores several key details about what the CBO report says elsewhere and what the bill — and the Treasury — have made clear: This effort aims to increase audits of corporations and high-net-worth individuals.
The full sentence in the CBO report that Brady was drawing from said the audit "rate would rise for all taxpayers, but higher-income taxpayers would face the largest increase."
Brady also failed to note a key difference between the budget office’s assessment from a year ago and the bill that was passed in 2022. The CBO assumed in its report that $60 billion of the $80 billion would go toward enforcement. But the current bill would result in substantially less than that — $46 billion — for enforcement, according to a Congressional Research Service analysis.
With nearly one-third less money for enforcement, the resulting number of audits would likely be smaller.
Perhaps the biggest problem with assuming there will be a big increase in audits for middle- to low-income Americans, however, is that it runs directly counter to the IRS’ stated policy, which Treasury Secretary Janet Yellen laid out in a letter to IRS Commissioner Charles Rettig.
"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 Aug. 10.
Rettig had said much the same in an Aug. 4 letter to Congress.
Audit rates for filers reporting less than $75,000 in income have held steady over the past several years at about 0.4%. That’s lower than the audit rate in 2011, when it was 1%.
Yellen said enforcement will focus on corporations and people with high net worth. Auditing them requires staff with special skills. Today, she said, the agency is able to audit only about 7,500 out of 4 million such returns each year.
Focusing on higher earners, as the IRS plans to do, would go a long way toward reversing the agency’s historical focus on auditing some of the lowest earners, largely households that file for the earned income tax credit.
The only caveat to Manchin’s statement is that there’s no guarantee the agency will adhere to the new policy it has announced.
"The pledge not to use the Inflation Reduction Act funds to increase audits of those making less than $400,000 is not built into law," John Buhl, senior communications manager at the Urban Institute-Brookings Institution Tax Policy Center, told PolitiFact West Virginia.
Although it’s not written in law, it’s a policy that has been stated publicly on several occasions.
"Both the IRS and Treasury are committed to that policy decision, as outlined in recent letters," said Erin Heeter, Manchin’s press secretary. "Both the IRS and Treasury also outlined in their recent letters that audit rates for families making under $400k will not change.
Buhl agreed that it’s unlikely that the IRS will perform audits on lower-income families when they already have documentation through W-2 wage pay stubs and other statements.
And audits of high earners are where the money is, anyway. The top 1% of earners account for about 30% of the $600 billion each year that is owed but goes uncollected, Natasha Sarin, counselor for Tax Policy and Implementation at the Treasury Department, told PolitiFact.
This limitation wasn’t written into the Inflation Reduction Act. However, top Treasury and IRS officials have consistently confirmed that the new resources allocated to the IRS by the law will be focused on audits of the highest-paying Americans, making it stated policy.
We rate the statement Mostly True.
Joe Manchin, tweet, Aug. 28, 2022
PolitiFact, "Kevin McCarthy’s mostly false claim about an army of 87,000 IRS agents," Aug. 11, 2022
Kevin McCarthy, tweet, Aug. 9, 2022
Congressional Research Service, IRS-Related Funding in the Inflation Reduction Act, Aug. 9, 2022
Congressional Budget Office, Estimated Budgetary Effects of H.R. 5376, the Inflation Reduction Act of 2022, Aug. 5, 2022
Kevin Brady, Brady on Manchin-Biden Bill: Attention Wal-Mart Shoppers–More IRS Audits Headed Your Way, Aug. 6, 2022
Congressional Budget Office, The Effects of Increased Funding for the IRS, Sept. 2, 2021
Congressional Budget Office, Trends in the Internal Revenue Service’s Funding and Enforcement, July 2020
IRS, IRS 2021 data book, accessed Aug. 10, 2022
IRS, IRS data book: Compliance Presence, accessed Aug. 10, 2022
U.S. Treasury Department, The American Families Plan tax compliance agenda, May 2021
U.S. Treasury Department, Sec. Yellin letter to IRS Commissioner Rettig, Aug. 10, 2022
Internal Revenue Service, Updated IRS audit numbers, May 26, 2022
IRS Commissioner Rettig, Letter to the U.S. House of Representatives, Aug. 4, 2022
National Bureau of Economic Research, Tax Evasion at the Top of the Income Distribution: Theory and Evidence, March 2021
TRAC, IRS Continues Targeting Poorest Families for More Tax Audits During FY 2022, March 29, 2022
GAO, Trends of IRS Audit Rates and Results for Individual Taxpayers by Income, May 17, 2022
U.S. Treasury Department, The Case for a Robust Attack on the Tax Gap, Sept. 7, 2021
Internal Revenue Service, IRS Budget & Workforce, May 26, 2022
Washington Examiner, 86,852 new IRS employees, Aug. 8, 2022
Government Executive, Some Specifics Emerge on How the Senate-Backed Tax-and-Climate Bill Would Impact Agency Staffing Levels, Aug. 8, 2022
Associated Press, GOP skews budget bill’s impact on IRS, taxes, Aug. 10, 2022
New York Times, The I.R.S. says new funding won’t mean more audits for middle-income Americans., Aug. 4, 2022
Interview with Natasha Sarin, counselor for Tax Policy and Implementation, U.S. Treasury Department, Aug. 10, 2022
Email interview with John Buhl, senior communications manager at the Urban Institute-Brookings Institution Tax Policy Center, Sept. 21, 2022
Email interview with Erin Heeter, press secretary for Joe Manchin
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