An expansion of the Internal Revenue Service (IRS) by the Inflation Reduction Act threatens to reap $20 billion from small businesses and middle-income Americans, according to a preliminary assessment last week from the Congressional Budget Office.
The $740 billion legislation, which currently awaits a signature from President Joe Biden after passing both the House of Representatives and the Senate, provides $80 billion in funds to hire 87,000 new IRS employees. The agency employed nearly 79,000 full-time employees as of fiscal year 2021.
Although Sen. Mike Crapo (R-ID) initially offered an amendment to explicitly codify that none of the new funds “may be used to audit taxpayers with taxable incomes below $400,000,” the amendment was rejected by every Democratic member of the Senate. A preliminary assessment from the Congressional Budget Office confirmed that the amendment would have eliminated at least $20 billion of the projected $124 billion in new revenue the expanded IRS is slated to collect, per Republicans on the House Ways and Means Committee — implying that the legislation will cost the middle class $20 billion.
Biden, however, recently promised that the Inflation Reduction Act “does not raise taxes on those making under $400,000 a year” — a promise upon which he had campaigned in 2020. Treasury Secretary Janet Yellen made a similar statement in a recent letter to IRS Commissioner Charles Rettig, directing him to refrain from using any new resources “to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels.”
Yellen failed to clarify that “historical levels” of audits were far higher as recently as one decade ago. Audit rates for Americans earning between $25,000 to $200,000 fell 76% between 2010 and 2019, while those earning less than $25,000 saw audit rates fall by 61%, according to a report from the Government Accountability Office.
Another study from the Congressional Budget Office based upon an earlier proposal to hire 87,000 new IRS agents revealed that audit rates “would rise for all taxpayers” under such a policy, even as high-income taxpayers “face the largest increase.” According to the Republicans on the House Ways and Means Committee, the new employees would be capable of executing 1.2 million more individual audits per year, with nearly half impacting Americans earning less than $75,000.
In her letter, Yellen also referenced a communication Rettig addressed to lawmakers last week as they deliberated on the Inflation Reduction Act, in which he vowed that the agency would “absolutely not” use its 87,000 new employees to target taxpayers by “increasing audit scrutiny on small businesses or middle-income Americans.”
“As an extremely proud American, I’m grateful for your support of the IRS and our dedicated employees,” Rettig wrote. “I cannot be forceful enough in emphasizing that these resources will be transformative for the agency and for American taxpayers.”
Beyond the promise to refrain from taxing Americans earning less than $400,000 per year, the Inflation Reduction Act seems to have failed in a key renewable energy incentive. Upon the bill’s successful movement through Congress, automakers Ford and GM each raised prices for many of their electric vehicles by $6,000 to $8,500 — a move that appears to subvert the $7,500 electric vehicle tax credits created by the legislation.