CBO: IRS Will Increase Audits On Middle Class, But Only A ‘Small Fraction’ Of New Tax Revenues

The Congressional Budget Office (CBO) admitted that the IRS will increase audits on middle-class Americans after it received a funding boost from the so-called “Inflation Reduction Act.”

In a letter to Republican House Ways and Means Committee ranking member Kevin Brady (R-TX) and Budget Committee ranking member Jason Smith (R-MO) Thursday, CBO said that at least some of the new tax revenues the IRS expects to collect over the next few years will come from families that earn less than $400,000 a year. However, the CBO expects the IRS to follow the directives set by Treasury Secretary Janet Yellen, and audits against the middle class will only account for a “small fraction” of new tax revenues.

“As a result of increases in outlays for the Internal Revenue Service (IRS) stemming from the act, the Congressional Budget Office estimates that revenues will increase by $180.4 billion over the 2022–2031 period,” CBO wrote in its letter. “CBO projects that some of the increased revenues will be collected from taxpayers with income less than $400,000; the amount will be a small fraction of the total increase.”

The CBO made reference to a directive issued by Treasury Secretary Janet Yellen earlier this month. In a letter to IRS Commissioner Charles Rettig on August 10, Yellen directed the IRS to use the nearly $80 billion in new IRS funding provided by the Inflation Reduction Act to “improve taxpayer service” and “increase equity in the tax system,” rather than increase enforcement on middle class families. “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 wrote.

In creating its projections, CBO assumed that the IRS would comply with Yellen’s directive and allocate enforcement resources to focus on what Yellen called “high-end noncompliance.” Therefore, it projected that “an increase in revenues collected from taxpayers with income less than $400,000 … will constitute a small fraction of the total increase collected from all taxpayers resulting from the increased funding for the IRS.”

Elsewhere in the letter, CBO noted that the IRS uses multiple collection methods, not just audits. CBO said it believes that with the new funding, the IRS will “use all available productive approaches to increase revenues and raise voluntary compliance from taxpayers with all amounts of income.” But the IRS typically allocates resources to maximize revenues, so imposing new restrictions will take time and increase administrative costs, and could actually decrease returns. Still, the law is projected to nearly double the IRS’s budget, increasing it by about 90% by 2031. That would make its annual budget even larger than it was at its peak in 2010. Furthermore, of the additional $79 billion in funding over the life of the law, more than half, about $46 billion, is allocated for enforcing tax laws; the rest of the new funding is allocated for taxpayer services, operations support, and modernization, and other activities.

Despite not directly increasing the number of audits on taxpayers who make less than $400,000 a year, it will still affect them in other ways, CBO projected:

Audits will still be conducted at historical rates, boosting audit activity and revenues in general.Activities other than audits, including collections and document matching, are not constrained by Yellen’s directive. “Under the 2022 reconciliation act, the amounts they generate will be greater for taxpayers with all amounts of income,” CBO wrote.Voluntary compliance will increase for all taxpayers.The increased funding for non-enforcement taxpayer services and other activities can also affect revenues if they enable taxpayers to report their income and calculate their taxes more accurately.

CBO added in the letter that it will publish a revised cost estimate of the entire reconciliation package in September.