When the Senate greenlit the $740 billion Inflation Reduction Act — possibly the most deceptively named bill to darken the halls of the Capitol — it also approved spending $80 billion to hire a veritable army of 87,000 new Internal Revenue Service (IRS) employees. Though estimating the cost of dealing with an IRS audit can be difficult to quantify, the burden imposed upon a business and its individuals — in the form of legal fees and spent time — can be extraordinary.
“My law practice was audited a number of years ago. It was a horrific experience,” attorney Steven Bazil of The Bazil Group recounted to The Daily Wire. “Between lawyers and accountants we spent hundreds of thousands of dollars to defend the audit. Ultimately she determined that we had done nothing wrong. She then hit us with a tax bill for almost a million dollars — disallowing many of our expenses. I was told by my attorneys at the time that she did this because she had to justify the amount of time she spent auditing us… the IRS was able to outspend us and it nearly destroyed my practice.”
Since the agency employed 79,000 people as of last year, Uncle Sam’s tax enforcement arm is slated to more than double in size under the new legislation — prompting concern among American businesses and individual taxpayers about the looming possibility of more audits. As Sen. Lindsey Graham (R-SC) colorfully noted, the influx of employees would fill some of the largest college football stadiums in his state.
To assuage such concerns, IRS Commissioner Charles Rettig penned a letter last week to lawmakers vowing that the agency will “absolutely not” increase audit scrutiny for “small businesses or middle-income Americans” in accordance with President Joe Biden’s promise to not raise taxes for those earning less than $400,000 per year. In another letter, Treasury Secretary Janet Yellen likewise directed Rettig to refrain from increasing audits for middle-income Americans — at least according to “historical levels.”
Yet, as Tax Foundation federal analyst Alex Muresianu told The Daily Wire, the promises by no means “sound binding or substantive.”
Indeed, a report from the Government Accountability Office shows that 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% — implying that there is plenty of room within “historical levels” to dramatically hike the number of audits. The report said that IRS officials “attributed the overall decline in audit rates to decreased funding, and therefore reduced staffing to conduct audits” — constraints which are removed by the Inflation Reduction Act.
“Bottom line — if you’re putting middle-class audit rates back to where they were in 2010, then you’re raising middle-class audit rates relative to the past few years,” Muresianu noted.
Another report from the Congressional Budget Office based on an earlier proposal to hire 87,000 new IRS employees found that audit rates “would rise for all taxpayers,” although higher-income taxpayers would “face the largest increase.” The new agents would be capable of carrying out 1.2 million more individual audits per year, with nearly half impacting Americans that earn less than $75,000, according to Republican members of the House Ways and Means Committee.
Muresianu explained that there are two types of audits that impact taxpayers. Correspondence audits involve the IRS “sending you a letter asking for you to provide or verify some information,” while field audits are “more extensive” and “usually have an in-person component.” The former is less expensive for the IRS, yet the latter tends to yield more revenue — especially for higher earners.
The additional recommended tax arising from an individual income audit is $9,000, according to the Government Accountability Office, while only 11% of correspondence audits and 9% of field audits as of 2019 resulted in the IRS concluding that the taxpayer had accurately covered his or her liability.
In any case, appealing or contesting the agency’s deliberations is extraordinarily difficult. For Bazil — whose firm has an international client base and therefore maintains offshore bank accounts to avoid expenses related to currency conversion — the agent assigned to his case “engaged in a massive fishing expedition” to implicate the firm in its practices.
“The audit started with one of my partners. It then expanded to include the law practice and me. The revenue officer… was clearly convinced that we were not reporting all of our revenue,” Bazil said. “Increasing the size of this politically charged, criminal organization is an incredibly bad idea.”