IRS gets $80 billion funding boost; Republicans warn of overreach

WASHINGTON — Will an armed IRS agent come knocking at your door next year?

That's an attack Republicans have made on an extraordinary infusion of $80 billion over the next decade into the U.S. Internal Revenue Service in the $739 billion Inflation Reduction Act passed by Democrats and signed into law by President Joe Biden.

"Think about it: If the left will weaponize the FBI to raid President Trump's personal residence, they will surely weaponize the IRS' new 87,000 agents, many of whom will be trained in the use of deadly force, to go after any American citizen," Rep. Andrew Clyde (R-Ga.) argued on the House floor during the debate over the legislation this month. 

IRS officials, tax experts and Democrats have criticized Republicans for making such charged statements, insisting they're wildly exaggerated and untrue, and pointing out the IRS does not arm its auditors and examiners.

Tax enforcement does get a major boost in funding: a total of $46.5 billion to hire more staff to beef up efforts to audit returns, collect owed taxes and conduct criminal investigations. And it is likely the IRS will audit more tax returns.

“The funding is an amazing political achievement,” said Janet Holtzblatt, senior fellow at the nonpartisan Urban-Brookings Tax Policy Center, in a posting on the center’s website. “Let’s face it, the IRS isn’t exactly the Prom King of government agencies.”

Since the 1980s, Republicans have sought to shrink what they call an oversized and intrusive federal government, largely by limiting funding and staff for the IRS, which raises money for government operations.

Last week, Democrats said the bill would restore much of that funding to the IRS by passing the massive budget reconciliation package, opposed by every Republican, to raise more money from unpaid but owed taxes and to create a fairer tax system.

Here are answers to some questions about the new funding for the IRS:

Why does the IRS need such a big infusion of funding?

Congress has underfunded the IRS over the past few decades, weakening its ability to provide taxpayer services and to conduct audits of tax returns, according to the U.S. Treasury Department and tax experts.

Since 2010, Congress has cut the IRS budget by 23% and the IRS reduced its staffing by 20% after a seven-year hiring freeze and inability to replace retiring workers, with the biggest drop being in auditors who work the most difficult cases, Holtzblatt told Newsday.

The IRS said it had a backlog of 9.7 million unprocessed individual 2021 returns as of this month, and its Taxpayer Advocate said IRS customer service representatives answered only about a tenth of taxpayer phone calls.

As a result, the IRS has been unable to collect about 15% of taxes owed as the rate of audits plummeted, especially among high earners, creating a gap of about $600 billion owed but not paid each year -- roughly 3% of the gross domestic product, according to the Treasury Department.

How does the IRS plan to use the $80 billion it will get over the next decade?

Treasury Secretary Janet Yellen on Aug. 17  ordered the IRS to produce a detailed operational plan six months from now for spending the $80 billion.

The IRS said it will largely spend the funds on upgrading technology — much of which dates to the 1960s — and on hiring tens of thousands of new employees to replace retirees and fill open positions, most of them for taxpayer services and operations but also for audits.

Five pages in the 273-page Inflation Reduction Act offer a broad outline: $46.5 billion for tax enforcement; $3.2 billion for taxpayer services; $4.75 billion for modernizing computers and business systems; $25.3 billion for operations support, and the rest for departmental offices and agencies.

Also, $15 million will go to developing and running a free e-file tax-return system taxpayers can use instead of purchasing commercial tax filing products.

Who will the IRS target for audits as it ramps up its enforcement efforts?

Yellen told Congress in a letter this month she has issued a directive that the IRS shall not use additional funding to increase audits, relative to historical levels, on households and small businesses earning $400,000 or less a year.

Instead, she wrote, the IRS will aim tax enforcement at large corporations, complex pass-through entities and high net-worth individuals. The top 1% of wealthy individuals alone do not pay an estimated $160 billion they owe each year, Yellen wrote.

The catch for most taxpayers is in the phrase “relative to historical levels.”

IRS officials said it would audit taxpayers about the same level as 10 years ago, when the rate of audits was at least twice as high as it is now. That means more IRS audits of taxpayers, as Republicans complain. 

What are the chances the IRS will audit a taxpayer?

Overall, the chances an individual tax filer will undergo an IRS audit remain very low.

In 2012, the IRS audited about 1.2 million of the 145 million individual tax returns filed, a rate of 0.8%. In 2021, the IRS audited 659,000 out of 160 million returns — a rate of 0.4%. 

But the IRS does not treat all taxpayers the same.

The IRS audits 1.6% of the filings by the lowest income earners who receive the Earned Income Tax Credit, as it looked for those who are ineligible for the credit. That drops the rate for all other individual files to 0.2%.

And for the richest individual filers, with incomes more than $20 million, the IRS audit rate dropped from 14% in 2011 to 2% in 2019, according to the 2021 IRS Data Book.

Meanwhile, the audit rate for corporations with $20 billion or more in income dropped from 78% in 2011 to 24% in 2019.

How will the IRS use 87,000 new agents?

IRS officials are working on the specifics of how it will add employees over the next 10 years, and plan to replace retirees in what they called one of the oldest workforces in the federal government, as well as filling open positions, according to the IRS press office. The 87,000 figure is based on a chart in a May 2021 IRS report showing it could hire an additional 86,582 employees with $80 billion over 10 years.

The IRS expects to lose approximately 10,000 employees each year for the next 5 years from a workforce of about 78,500, while also filling the many open positions in customer service and information technology. 

About 43% of IRS employees participate in audits, collecting taxes and pursuing criminal investigations, according to the 2021 IRS Data Book. The majority engage in customer service, operations and other work.

Will armed IRS agents turn up on my doorstep next year?

No. Unless you engage in a criminal plot to evade taxes through money laundering or narcotics trafficking, you will not likely see one of the relatively few 2,100 IRS armed special agents anywhere near your home, the IRS said.

Only special agents in the IRS Criminal Investigations division can carry firearms, the IRS said, not auditors and examiners. And last year, the IRS conducted just 1,766 criminal investigations.

Asked about the assertion that armed agents will show up at average taxpayer homes, the IRS press office responded: “This is absolutely untrue.”