The Internal Revenue Service has a plan for how it wants to use $80 billion to revamp the agency, and revive high-end audits.
Now it has to put it into work — and that work is cut out for the agency.
Wally Adeyemo, the deputy secretary at the Treasury Department, said Monday he knows the tough job that’s ahead.
“‘We know that the place where we need to do the most work is making sure that we increase audit rates for the top 1% frankly.’”
“The challenge, of course, is that it takes a lot longer to audit someone who makes their money in various ways than to audit somebody who makes their money through a W2,” Adeyemo added.
He spoke Monday at a think-tank event held by the Tax Policy Center on how the IRS will attempt to use the $80 billion earmarked over a decade to fund more audits on rich taxpayers and corporations, along with customer service upgrades.
The W2 is the tax form that wage earners — and the IRS — receive showing their yearly pay. It takes about five hours for an average audit, Adeyemo said.
April 18 is Tax Day, the deadline to pay taxes owed for 2022 and file returns or get an extension.
Making sure rich taxpayers pay their full bill can be a much lengthier process compared to an average audit, according to Adeyemo.
But that’s where the money is, he said. The federal government is missing approximately $160 billion annually in tax revenue that the top 1% of taxpayers do not turn over, Adeyemo estimated.
Congress authorized the $80 billion in the Inflation Reduction Act, a law that passed last summer along party lines when Democrats controlled the House of Representatives and the Senate.
On Friday, new audit-rate statistics showed the continuing slide in audits for an agency that’s lost staffing and taken on an increasing workload over the years.
Just over 9% of tax returns worth at least $10 million were audited for tax year 2018, according to the IRS on Friday. While that’s up from a 5.8% audit rate for tax year 2017, it’s down from 13.6% for tax year 2012, the agency noted.
After a tax return is filed, the IRS has up to three years to initiate an audit. That means it takes three years for audit rates to finalize for a given tax year. The tax year 2018 numbers are the newest numbers beyond the statutory deadline to start a new audit.
A major flashpoint in the fight over the $80 billion in IRS funding has been Republican concern over whether middle-class taxpayers would get audited more, despite assurances from the Biden administration that that would not be the case.
Treasury and IRS officials have said the extra money for enforcement will not result in extra audits for households earning less than $400,000 a year.
Comparing tax-year 2017 and tax-year 2018 audit rates, there is the sizable jump in audits for returns over $10 million. But mostly, the percentages of examined cases mostly fell all along the income ladder.
The biggest drop occurred for tax returns worth between $5 million and $10 million, where the audit rate fell to 2.2% from 3.1%, the numbers show. The audit rates for tax-year 2018 returns worth up to $500,000 ranged from 0.2% to 0.4%.
The numbers also show the “continued resource constraints have limited the agency’s ability to address high-end noncompliance,” the agency said in a statement last Friday. But that should change as the Inflation Reduction Act money flushes in, the IRS noted.
On Monday, Adeyemo said IRS funding money from the Inflation Reduction Act is “going to put us in a place where we can actually do a better job of auditing the places where we think that there is income that is hiding from the American people.”
The IRS plans to hire more than 7,000 people for its enforcement efforts in the coming two years, according to its spending plan for funding released under the Inflation Reduction Act.
Of course, the IRS will need to hire more staff that can parse through complicated returns. Observers say hiring accountants, attorneys, data scientists and other specialized staff will be another challenge for the agency.
