Treasury Secretary Janet Yellen vowed on Wednesday that Internal Revenue Service (IRS) audit rates for Americans earning less than $400,000 per year would not increase — at least according to “historical levels,” which are far higher than current levels.
The Biden administration official’s promise comes as the Inflation Reduction Act — a $740 billion proposal that includes $80 billion for the IRS to hire 87,000 more employees — advances through Congress. In a letter to IRS Commissioner Charles Rettig, Yellen argued that the funding would help the IRS “improve taxpayer service” and “increase equity in the tax system” rather than allow the agency to target middle-income Americans.
“I direct that any additional resources — including any new personnel or auditors that are hired — shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels,” Yellen told Rettig. “This means that, contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited.”
Yellen failed to mention, however, that “historical levels” of audits were significantly higher as recently as one decade ago. According to a report from the Government Accountability Office, 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%. Taxpayers earning between $200,000 and $500,000 — representing those at the upper end of the Biden administration’s vow to not raise taxes for those earning less than $400,000 — saw a 92% decline in audits.
Indeed, 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 directly addressed by the Inflation Reduction Act.
Another report from the Congressional Budget Office based on an earlier proposal to hire 87,000 new IRS agents found that audit rates “would rise for all taxpayers,” even as higher-income taxpayers “face the largest increase.” According to Republican members of the House Ways and Means Committee, the new agents would be capable of carrying out 1.2 million more individual audits per year, with nearly half impacting Americans earning less than $75,000.
Despite leaving room for higher audit rates relative to “historical levels,” Yellen argued that information technology updates funded by the bill would help Americans avoid audits in the first place. “The result of this resource infusion will be a lower likelihood of audit by an agency that has the data and technological infrastructure in place to target enforcement resources where they belong—on the high end of the income distribution, where the top 1% alone is estimated to not be paying $160 billion in owed taxes each year,” Yellen wrote. “That’s important as a matter of revenue-raising, but it’s also essential as a matter of fairness.”
The IRS employed nearly 79,000 full-time employees as of fiscal year 2021, according to the agency, which also reported $13.7 billion in operating costs.
Yellen also referenced a letter Rettig addressed to lawmakers last week, 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 added. “I cannot be forceful enough in emphasizing that these resources will be transformative for the agency and for American taxpayers.”