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What the new $80 billion for the IRS really means for your taxes

A sign reading “Internal Revenue Service” outside a building
Photo by Chip Somodevilla/Getty Images

The Inflation Reduction Act includes nearly $80 billion in funding for the IRS, which is supposed to help the underfunded agency hire more staff and collect unpaid taxes from wealthy Americans.

Democrats’ new climate, health care, and tax package — known as the Inflation Reduction Act — includes nearly $80 billion in new funding for the Internal Revenue Service, which is supposed to help the chronically underfunded agency staff back up and boost enforcement measures to collect unpaid taxes from wealthy Americans.

The funding has become a political flashpoint in recent days among conservatives and some business groups, who have falsely claimed that the IRS will use the money to hire an “army” of 87,000 new agents who will target average taxpayers.

Sen. Mike Crapo, the top Republican on the Senate Finance Committee, said the new funding would be used to “squeeze more revenue” out of Americans who make less than $400,000 because they’re “easy targets.”

Rep. Kevin McCarthy, the House minority leader, said the money would be used to “harass the middle class.” The National Federation of Independent Business called the enforcement efforts an “indirect tax” that would burden small businesses with more audits and examinations.

Treasury Department officials say all of those claims are false. Administration officials have reiterated that they will focus enforcement efforts on wealthy Americans and large corporations.

The $80 billion in funding for the IRS is a small fraction of the Inflation Reduction Act, which is expected to include more than $400 billion in spending. It’s meant to begin reversing more than a decade of decay and budget cuts at the agency. The IRS’s budget has been cut by nearly 20 percent since 2010, impacting the agency’s ability to staff up and modernize half-century-old technology. In 2010, the IRS had about 94,000 employees. That number dipped to about 78,000 employees in 2021. Some of the agency’s computers still run on COBOL, a programming language that dates back to the 1960s.

Since 2010, the agency’s enforcement staff has declined by 30 percent, according to IRS officials, and audit rates for the wealthiest taxpayers have seen the biggest declines because of years of underfunding. The new bill is an attempt to change that.

What the bill means for most people who file taxes

The new funding is intended to help reduce the “tax gap,” or the difference between what people pay in taxes and what they owe in taxes, which the Treasury Department estimates is about $600 billion annually. The new money could help the IRS increase revenue by about $200 billion over the next decade, according to a Congressional Budget Office estimate, although the exact amount is hard to calculate and highly uncertain.

Natasha Sarin, a counselor for tax policy and implementation at the Treasury Department, said that for Americans making less than $400,000 a year, their chances of being audited wouldn’t increase from typical levels in recent years.

Instead, Sarin said, average taxpayers should have an improved experience filing their taxes because the funds would allow the agency to staff up. In the first half of 2021, there were fewer than 15,000 employees available to answer nearly 200 million calls, which is one person for every 13,000 calls, according to Treasury Department figures.

“For regular taxpayers, for small businesses, for low-income taxpayers, the only shift that they are going to realize is there is going to be an IRS employee that can answer the phone when they call,” Sarin said.

As a result of reduced staffing at the IRS, audit rates of individual income tax returns decreased for all income levels from 2010 to 2019, according to a recent Government Accountability Office report. Audit rates decreased the most for taxpayers with incomes of $200,000 or more.

In 2019, the audit rate for taxpayers with income between $25,000 and $200,000 was .17 percent, according to the report. For those making $5 million or more, the audit rate was 2.35 percent in the same year.

A 2018 analysis by ProPublica found that while audits had declined most dramatically for the wealthy, the IRS continued to audit the poorest filers — recipients of anti-poverty tax credits, including the Earned Income Tax Credit — at relatively high rates.

Over the last decade, audit rates for multimillionaires have decreased by twice as much as audit rates for the lowest-income families who receive the EITC because it requires more resources to go after top earners, Sarin said.

The funding should allow the IRS to better target wealthy earners who aren’t paying their taxes because the agency will be able to upgrade its technology, Sarin said, reducing the chances that compliant taxpayers would be audited.

Janet Yellen, the Treasury secretary, reaffirmed similar commitments in a letter to the IRS commissioner last week.

“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,” Yellen wrote.

Bill Hoagland, a senior vice president at the Bipartisan Policy Center who focuses on economic policy, said improving these aspects would help make it more efficient for average earners to file their taxes, since they could more easily get information to help fill out their tax forms.

Budget cuts and reduced capacity have led to a significant backlog of unprocessed tax forms. As of the beginning of August, the IRS had a backlog of 9.7 million unprocessed individual 2021 returns.

“The long story short here is that the average American should not be threatened by this, but should be thankful that they are putting money into taxpayer services that have dwindled tremendously,” Hoagland said.

Janet Holtzblatt, a senior fellow at the Tax Policy Center, said in general, she believed the IRS was committed to upholding its goal of focusing enforcement efforts on wealthy Americans and large corporations. But she said that depends in part on the IRS’s ability to determine people’s “actual” incomes.

“The kinds of taxpayers who fall in that category where there might be some uncertainty are going to be the self-employed, it’s going to be partners, it’s going to be people who are receiving income that’s not subject to a W-2,” Holtzblatt said. “It’s the ones whose income are not independently reported that become more of a challenge to identify.”

Sarin said the IRS would focus on hiring employees who have experience working with complex tax filings from large corporations and high-net-worth individuals. Audits of average taxpayers follow a significantly different process, she said.

Is the IRS really going to hire 87,000 auditors?

Of the nearly $80 billion for the IRS in the bill, more than half, or roughly $46 billion, will be used to improve enforcement measures.

The IRS hasn’t yet released estimates for how many new employees the agency could hire with the new funding in the Inflation Reduction Act. The agency is expected to release the final numbers and breakdown in the coming months.

The 87,000 figure appears to come from a report the Treasury Department published in May 2021, which outlined the impact of tax compliance measures in the Biden administration’s American Families Plan proposal. The report estimated that the IRS could hire 86,852 employees by 2031 with nearly $80 billion in additional funding.

But Sarin said the new funding would also be used to hire other types of employees, such as customer service representatives and IT specialists, and not just new auditors.

She also said many of the new hires would fill positions left open by employees who are projected to leave the agency over the next decade. At least 50,000 of the agency’s current employees are expected to leave over the next five years because they’re eligible for retirement, Sarin said.

Douglas Holtz-Eakin, the president of the conservative American Action Forum and former director of the Congressional Budget Office, said the additional funding didn’t guarantee that the agency would be able to significantly narrow the tax gap since wealthy people typically have lawyers that can draw out the auditing process. But the new funding would still help reverse the agency’s decline, he said.

“The workforce is down about 20 percent,” Holtz-Eakin said. “So anything that reverses that has to be considered very significant.”


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