After enduring a multi-year assault on its budget, the Internal Revenue Service is on track to get almost $80 billion in additional funding if Democrats get their way and the House approves the Biden administration’s Reconciliation Bill.
More than half of the $79.6 billion allocated to the IRS as part of Biden’s Inflation Reduction Act over the next 10 years is supposed to be for enforcement. The administration promoted the bill by saying it would allow the IRS to collect more from corporate and high-net-worth tax dodgers.
However, opponents of the enhanced IRS budget argue that it will hurt small businesses and middle-income Americans.
“My colleagues claim this massive funding boost will allow the IRS to go after millionaires, billionaires and so-called rich ‘tax cheats,’ but the reality is a significant portion raised from their IRS funding bloat would come from taxpayers with income below $400,000,” said Sen. Mike Crapo, R-Idaho, ranking member of the Senate Finance Committee, in a statement.
Here are five things to know:
The U.S. tax code disadvantages Black Americans
The median wealth of white families is almost eight times more than Black families and this racial wealth gap is driven in part by the way the federal tax code is written, according to Dorothy A. Brown,. An Emory University law professor, Brown wrote the book, “The Whiteness of Wealth: How the Tax System Impoverishes Black Americans — and How We Can Fix It.”
“Black and white Americans engage in the same activity, but tax law impacts differently because we bring our racial identities onto our tax forms,” Brown told CBS News. “What the tax law does every April 15 is see to it that Black Americans pay higher taxes than their white peers.”
One way Black families are disadvantaged involves how married couples are taxed versus singles, Brown said. If only one spouse works, the couple gets a tax cut. But if both spouses work, their tax rate probably will go up.
White married couples are more likely to have a stay-at-home spouse and get a tax cut, while Black married couples are more likely to have both partners working, therefore paying higher taxes.
Brown blames the federal government for continuing to penalize dual-earner households and failing to address issues of race and tax policy. As a result, the tax code remains discriminatory, Brown said.
IRS audits poor Americans at about the same rate as the top 1%
The IRS has been losing hundreds of agents each year to retirement but audits of lower-income Americans has held steady in recent years, ProPublica reported in 2019. Millionaires were about 80 percent less likely to be audited in 2018 than they were in 2011, according to IRS data.
In 2018, the top 1 percent of taxpayers by income were audited at a rate of 1.56 percent. By comparison, recipients of earned income tax credit or EITC, who generally have annual income of less than $20,000, were audited at 1.41 percent.
The earned income tax credit is one of the country’s largest anti-poverty programs.
ProPublica mapped the estimated audit rates for every U.S. county. The counties with the highest audit rates were poor, rural, mostly African American and in the South, a reflection of the high number of EITC claims there.
It’s easier to audit poor Americans than rich
It takes fewer skills for IRS auditors to audit the poor than it does to audit wealthy taxpayers who have at their disposal high-powered tax lawyers.
Audits of EITC recipients are mostly automated and far less complicated.
“While the wealthy now have an open invitation to cheat, low-income taxpayers are receiving heightened scrutiny because they can be audited far more easily. All it takes is a letter instead of a team of investigators and lawyers,” said Sen. Ron Wyden, D-Ore., the ranking member of the Senate Finance Committee.
“We have two tax systems in this country,” he said, “and nothing illustrates that better than the IRS ignoring wealthy tax cheats while penalizing low-income workers over small mistakes.”
The Inflation Reduction Act will double the size of the IRS
The Inflation Reduction Act could double the number of IRS agents and audits by enabling the hiring of up to 80,000 more auditors.
Media personality and investor Peter Schiff, the CEO of broker-dealer Euro Pacific Capital, tweeted that the IRS will employ more people than the Pentagon, State Department, FBI, and Border Patrol combined.
This army isn’t needed to target billionaires “but the underground economy that middle and lower income workers rely on,” Schiff tweeted. “#Democrats now intend to shake down small business owners, the self-employed, side-hustles, gig workers, and #crypto traders, in an effort to force the little guy to pay an additional $200 billion in taxes, interest and penalties.”
Auditing the poor discourages families in need from claiming earned income tax credit
Audits have discouraged hundreds of thousands of poor families who might qualify for the EITC credit from claiming it, ProPublica reported.
An audit triggers the refund to be held, which is often a shock to the family and the audits rarely end well, according to data. Most taxpayers never respond at all, and the poorer the target of the audit, the less likely they are to respond. Those earning less than $10,000 a year didn’t respond at all in 64 percent of EITC audits. For those with income exceeding $40,000 per year failed to respond to the IRS in 35 percent of cases.
earned income tax credit