The Biden administration has promised not to raise taxes on anyone making under $400,000 a year. And despite estimates from official congressional scorekeepers that the Schumer-Manchin-Biden tax increase indeed would raise taxes on those Americans, the administration has doubled down on the claim as a final vote nears on Democrats’ bill.
Treasury Secretary Janet Yellen sent a letter Wednesday to IRS Commissioner Charles P. Rettig that includes this statement:
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’s directive follows Rettig’s Aug. 4 letter to U.S. senators declaring the same objective:
These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans. As we’ve been planning, our investment of these enforcement resources is designed around the Department of the Treasury’s directive that audit rates will not rise relative to recent years for households making under $400,000.
But considering the sheer magnitude of 87,000 new IRS agents and an estimated $204 billion in new revenues from enforcement, is it possible for all those new audits and revenues to involve only taxpayers making over $400,000?
—Returning to 2010 audit rates for all individuals making over $400,000 would generate only 28%, or $9.9 billion, out of the estimated $35.3 billion in new IRS enforcement revenues in 2031.
—Even increasing recent audit rates 30-fold for taxpayers making over $400,000—including 100% audit rates on taxpayers with incomes over $10 million—still would fall more than 20% short of raising the estimated $35.3 billion in new revenues in 2031.
Note: This assumes a 98% increase in the number of tax filers making over $400,000 between 2019 and 2031, based on annual growth rates between 2014 and 2019. Audit rates from 2010 to 2019 by income group and additional tax per individual tax return audited for 2021 is available here from the nonpartisan Government Accountability Office.
Estimated revenuesfrom a 30-fold increase in audits almost certainly is overstated, since 30% to 40% percent of audits in these income groups result in no additional tax being owed, and audits already target returns with higher likelihoods of underpayments.
—Auditing every single taxpayer with annual income over $1 million would require only 25,000 new IRS enforcement agents, but Democrats’ bill calls for 87,000 new agents. What will all those extra agents be doing?
Note: Estimates are based on the Treasury Department’s estimated new full-time-equivalent agents, and the Government Accountability Office’s estimated hours per audit by individual income level.
Calculations conservatively assume that only 57.3% of the Treasury Department’s estimated 86,852 new IRS agents (49,754 in total) would be assigned to enforcement, based on $45.6 billion of the bill’s $79.6 billion increase for the Internal Revenue Service dedicated to enforcement.
Calculations also assume that 8.9% of IRS enforcement agents would be assigned to corporate audits, based on the Congressional Budget Office’s estimate[MK1] [GR2] that corporations account for 8.9% of the tax gap. Enforcement agents are assumed to spend 75% of their paid time auditing tax returns.
Despite the Biden administration’s claims, it’s almost certain that households making less than $400,000 a year would face increased audits under Democrats’ bill.
And that seems to be the true intent of the IRS. According to a 2021 report from the Government Accountability Office, “From fiscal years 2010 to 2021, the majority of the additional taxes IRS recommended from audits came from taxpayers with incomes below $200,000.”
That recommendation is based on audits of lower-income tax returns producing more bang for the buck, as the report noted:
Audits of the lowest-income taxpayers, particularly those claiming the EITC [earned income tax credit], resulted in higher amounts of recommended additional tax per audit hour compared to all income groups except for the highest-income taxpayers.
The Treasury Department’s report on the proposed new funding includes a footnote highlighting the already-high prevalence of IRS audits among low-income households:
“Work by former IRS economist Kim Bloomquist points out that the five counties with the highest audit rates are predominantly African-American, rural counties in the South,” the report says.
High rates of return from auditing low-income households alongside the average large corporate tax filing totaling nearly 6,000 pages says that our current tax code is far too complex.
Instead of increasing taxpayer audits, policymakers should simplify taxes across the board. That way, it would be easier for everyone to pay the correct amount to the government.
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