Will the Inflation Reduction Act Affect Audit Likelihood?
TL/DR –
The Inflation Reduction Act aims to provide the IRS with nearly $80 billion over a decade, of which $45.6 billion will go towards tax enforcement activities like hiring agents, legal support, and investing in technology. The investment could facilitate the hiring of nearly 87,000 new employees by 2031. Critics argue that increased enforcement measures could mean more audits for low- and middle-income filers, although the IRS has stated that the resources are “absolutely not about increasing audit scrutiny on small businesses or middle-income Americans”.
Potential Impact of the Inflation Reduction Act on IRS Tax Enforcement
The passage of the Inflation Reduction Act might leave many questions about the IRS Tax Enforcement provision unanswered. As per the Congressional Research Service, the Act would grant the IRS close to $80 billion, $45.6 billion of which would be for “tax enforcement activities”. This includes hiring additional enforcement agents, providing legal assistance and investing in investigative technology.
A report by the Treasury Department in May 2021 indicated that a $80 billion investment in the IRS over a decade would enable the agency to recruit almost 87,000 new employees by 2031. This workforce would comprise of support staff, IT technicians, and corporate auditors.
Concerns About Increased Audits for Low- and Middle-Income Filers
Critics argue that the additional funding for the IRS could result in a surge in audits for low- and middle-income filers, who are typically audited more frequently. IRS Commissioner Charles Rettig assured in a letter to Senate members that the resources are not intended to increase audit scrutiny on small businesses or middle-income Americans.
According to Treasury officials, high-earning Americans and businesses will be targeted. However, self-employed workers and cash businesses could face higher audit rates. The IRS audits tax returns using a software system that triggers an alert when it detects a disproportionate deduction-to-income ratio, unreported income and other such factors.
Audit Rates by the IRS
The Treasury report reveals a 44% decrease in audits conducted by the IRS between 2015 and 2019, including a 75% drop for those earning $1 million or more and a 33% fall for low-to-moderate income taxpayers claiming the Earned Income Tax Credit.
For more information, check out Tax Worry: Will Inflation Reduction Act Impact Who Is More Likely To Be Audited? on GOBankingRates.com.
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