Posted on 10/31/2023 8:52:00 AM PDT by SeekAndFind
IRS Commissioner Danny Werfel faced a grilling by lawmakers on Capitol Hill this past week, where he hinted that there's a chance that the agency will—contrary to its repeated pledges—increase tax audits of Americans earning under $400,000.
The question of whether the IRS will use some of the $80 billion or so funding boost to increase tax enforcement of people making less than $400,000 has been a contentious issue.
IRS and Treasury Department officials have pledged not to increase audit rates for this group of Americans, while Republicans and others have argued that this pledge is either false or wishful thinking.
Treasury Secretary Janet Yellen has directed the IRS not to raise audit rates above historical levels for this group of taxpayers, while Mr. Werfel has repeatedly made the same pledge.
But a watchdog recently cast doubt on this promise, warning that Americans making less than $400,000 could inadvertently get caught in an enforcement dragnet because the IRS doesn't have a clear definition of "high-income" and its enforcers use an outdated $200,000 high-income threshold as their default.
Meanwhile, the latest data on the tax gap (the difference between taxes owed and paid to the government) show that it has jumped from $601 billion to $688 billion, putting pressure on the IRS to ramp up enforcement and bring in more money for all the Biden administration's big spending plans.
At the Oct. 24 hearing on Capitol Hill, Rep. Gary Palmer (R-Ala.) pointed out that former IRS Commissioner John Koskinen once testified that increasing tax audits as a way to reduce the tax gap was not an advisable strategy.
“One of your predecessors, John Koskinen, testified before this committee in 2015, and he said it would not be advisable to audit your way out of the tax gap, yet that’s exactly what you’re trying to do,” Mr. Palmer said.
In a bid to increase tax collections, the IRS has vowed to increase tax enforcement on corporations and high-income filers in a "sweeping, historic" crackdown on what it says are wealthy tax evaders.
In his line of inquiry, Mr. Palmer implied that the IRS' appetite to boost collections would mean some lower-earning Americans could get caught up in that effort.
Mr. Werfel said he had instructed staff at the IRS not to raise audit rates for lower-earning Americans but hinted that there's some chance this could (inadvertently) happen, and only time will tell.
After Mr. Palmer questioned Mr. Werfel, Rep. Virginia Foxx (R-N.C.) pressed the IRS chief to explicitly guarantee that the IRS wouldn't raise audits on Americans making less than $400,000.
“The so-called Inflation Reduction Act gave the IRS an additional $80 billion in funding. I think we can all agree that that’s an incredible amount of money. Even after Congress trimmed this amount down to nearly $60 billion in the Fiscal Responsibility Act, how many new agents does the IRS plan to hire?” she asked.
Mr. Werfel sought to deflect by focusing on all the other hires that the IRS is planning.
“We’re hiring not just agents. We’re hiring customer service reps, accountants, agents," he said. "We have published our three-year view of staffing, which I’m very confident on because I can make key assumptions about needs and market trends. We are at 90,000 today, and I think over the next three years, we should be over 100,000, but not much over 100,000."
Asked how many tax enforcement agents there would be among this figure, Mr. Werfel replied: “We should be hiring about 8,000 total by the end of 2025.”
“You are guaranteeing that you will not increase the number of audits of people making less than $400,000 a year?” Ms. Foxx then asked.
“That is my marching order to the IRS," Mr. Werfel replied before adding that "if we fall short of that, I will be held accountable for it," hinting that, even with the best of intentions, there's a chance that the IRS might fail to make good on this promise, much like the watchdog has warned.
"But we will publish those rates,” Mr. Werfel added, referring to tax audit rates for Americans earning less than $400,000, suggesting that time will tell how closely the agency's growing army of tax enforcers will follow his orders.
"A little while ago, you said you had control of the IRS," Ms. Foxx said. "So we'll come back to you with that," she added, suggesting that Republicans intend to hold Mr. Werfel to account over the $400,000 tax audit pledge.
Some time ago, the Treasury Inspector General for Tax Administration (TIGTA), which is the watchdog overseeing the IRS, carried out a review to assess the IRS's strategy to train employees hired to audit high earners and big businesses that underreport income.
The watchdog report includes scathing criticism of the IRS for lacking a clear definition of "high-income" earners—despite the very same watchdog asking the IRS to look into developing a better definition years ago.
"The IRS does not have a unified or updated definition for individual high-income taxpayers," the watchdog said in the report, which notes that the IRS uses different definitions of "high-income" depending on context as various IRS programs address different compliance issues across different parts of the filing population.
"The high-income terminology is being used loosely inside the IRS with no common understanding of what the term means,” the watchdog said.
The watchdog recommended in 2015 that the IRS reevaluate the appropriate income thresholds for its high-income and high-wealth strategy.
But despite its recommendation to the IRS nearly a decade ago to reevaluate its income thresholds, the IRS "made no changes," the watchdog said, noting that the tax agency cited "internal data analysis results and resource constraints."
Further, the IRS continues to rely on old tax examination activity codes adopted half a century ago with the Tax Reform Act of 1976, which used a $200,000 threshold to measure high-income returns.
"This amount is equivalent to more than $1 million in 2023, but the IRS still uses $200,000 as the default high-income threshold," the watchdog said, adding that the $200,000 threshold is "no longer a reasonable standard for high earners given inflation since 2005."
Generally, the IRS uses the examination activity codes to plan the number of tax-related examinations, although, since 2019, its Large Business and International (LB&I) division has been using a modified planning method based on resource allocation.
One of the watchdog's recommendations was for the IRS to establish a definition for high-income taxpayers for examination compliance purposes and that, “at a minimum, the IRS should accept the Treasury secretary’s $400,000 directive as the new high-income floor on which IRS leadership can focus enforcement efforts.”
The IRS disagreed with the watchdog's recommendation. It asserted in a statement included in the report that a "static and overly proscriptive" definition of high-income taxpayers for audit purposes "would serve to deprive the IRS of the agility to address emerging issues and trends."
The watchdog commented on the IRS' pushback, saying that the definition need not be "static" and income thresholds should be adjusted based on economic and complexity factors—otherwise, there's a risk that the agency will break its pledge not to audit more Americans earning less than $400,000.
"When the high-income thresholds are set too low, the result can be higher numbers of inefficient examinations," the watchdog said. "When the definition is too low, the base of taxpayers earning those incomes is wider so that the IRS does many more audits in that category in order to achieve desired audit coverage."
The watchdog said that, under the circumstances of a lack of a clear definition of "high-income," the IRS would not only be conducting more audits on lower-earning Americans (contrary to its pledge not to), but it would also be less effective in its stated goal of closing the tax gap.
The watchdog also said that the IRS's lack of action in response to the TIGTA recommendation in 2015 to reevaluate its income thresholds means that the IRS is in a difficult position if it hopes to meet its pledge not to raise audit rates above historical norms for Americans earning less than $400,000.
Currently, "there is no way to identify the complete population of taxpayers that meet the criterion of $400,000 or more specified by the current Treasury Secretary," the watchdog added.
The IRS partially agreed with the watchdog's recommendation to refine its examination activity.
"The IRS agreed to identify the best method to identify and track high-income examinations as part of the work being undertaken to implement the Treasury Secretary's directive to not increase audit rates for households making less than $400,000 and small businesses," the IRS said in a statement included in the report.
But the watchdog responded by saying this isn't good enough.
"The IRS's partial agreement and planned corrective action will not satisfy the intent of our recommendation, and additional actions are needed," TIGTA said in a comment.
"The IRS should establish examination activity codes for additional TPI increments, which will help the IRS identify noncompliance at different income levels," the watchdog added. TPI stands for "taxpayer profile increment."
When The Epoch Times asked the IRS for comment on the watchdog's rejection of the IRS's response to its recommendation, the tax agency pointed to its original response included in the report.
I’m shocked… SHOCKED!
unless your name is Biden
Hey ... maybe someone in the US House should propose a bill that sends money to Israel and balances that expenditure with cuts in the IRS budget so that they can’t audit people willy-nilly ...
Coming for the ones who sell old stuff at garage sales.
It’s not so much for the money, as the chilling power of intimidation that it has over the hard-working, honest public.
How about seizing all of george soros’ money? bill gates’ and jeff besos’ billions too.
Going to the U.S. Gubmint technique. They bring you in with no proof a crime was committed by you and then they start with bullsh*t stuff like gag orders and accusations hoping you say something they can label perjury or some other violation so they can fine you and throw your ass is prison.
the 16th was passed with the argument that it was only a tax for millionaires
Become familiar with the term “imputed income”. That will be the next vehicle for IRS abuse. They will also be assessing your standard of living and make a determination as to whether or not your income supports it. If they think not, they will add an estimated unreported income to that and tax it (with penalties).
What a great idea! Ought to send that…to…someone.
When I (nervously) called the IRS about the problem I was shocked at how pleasant and helpful they were. Shocked, I tell ya.
I made 2 calls and the 2 ladies I spoke with could not have been nicer.
Not only did they fix the problem, but one lady volunteered to apply on my behalf for a reduction in my penalties (not due to the IRS error).
I just got a letter last week saying that my application had been approved and I got a nice reduction in the amount owed.
What a suPRISE!
“Suprise, suprise, suprise!!”
(Thank you, Lance Cororal!)
80,000 new agents had to do SOMEthing, of course...
-PJ
Come on. Do you think the left cares?
I have itemized for about 30 of the last 35 years.
House is paid for. With the increase in standard deduction. I feel many others are in the same boat. Kind of hard to audit when you take standard deduction.
Unless the irs thinks I am hiding income, which is pretty hard these days. Why threaten an audit. I don’t think it’s too difficult to prove info. On line and self tax software made doing taxes pretty easy. Plus. For $50 I always also take the audit defense.
Only trouble i ever had was with the college tuition tax credit a few years ago. The software and the schools weee wrong .
It was only after many many days of being on hold with a he irs did someone there explain what I needed to do.
Funny, I gave this info to the college and their financial aid sept said the irs was wrong and the school was right….. BS,
I finally submitted correct info and the credit was food
All the more reason to CUT their budget and support Israel with it, or at least replenish US ammo vs. chinee-commies.
“Hey ... maybe someone in the US House should propose a bill that sends money to Israel and balances that expenditure with cuts in the IRS budget ...”
Yesterday’s news!
Give me a break! They barely have enough people to answer the phones. 🙄
I’m hearing what’s left of the IRS is being housed over at the Treasury Department and will be utilized to help administer the coming change over to the sales tax.
New IRS form only has on question on it now.
How much did you earn last year send it to us.
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