Jeffrey Coolidge | Photodisc | Getty Images
As the The Democrats’ spending plan moves closer to a vote in the House, one of the most controversial provisions – nearly $80 billion in IRS fundingwith $45.6 billion for “enforcement” – has raised questions about who the agency can target for audits.
IRS Commissioner Charles Rettig said the resources are “absolutely not intended to increase audit control over small businesses or middle-income Americans,” in a recent letter in the Senate.
However, with the investment expected to bring in $203.7 billion in revenue from 2022 to 2031, according to the Congressional Budget Officeopponents say the IRS enforcement may affect ordinary Americans.
Learn more about personal finance:
Cut Inflation Act Aims to Reduce Insulin Costs for Medicare Users
Expanded Health Care Subsidies Remain Intact in Inflation Reduction Act
Reconciliation bill includes nearly $80 billion for IRS, including ‘enforcement’
“Our biggest concern about this is that the burden of these audits will be on Walmart shoppers,” Rep. Kevin Brady, R-Texas, said on CNBC’s “Squawk Box” on Tuesday.
Overall, IRS audits dropped 44% between fiscal years 2015 and 2019, according to a 2021 Treasury inspector general for the tax administration report.
While audits dropped 75% for Americans earning $1 million or more, the percentage dropped 33% for low-to-moderate income filers claiming the earned income tax creditknown as the EITC, according to the report.
Our biggest concern in this regard is that the burden of these audits will fall on Walmart shoppers.
Representative Kevin Brady, R-Texas
Ken Corbin, head of taxpayer experience for the IRS, said statements claiming the EITC had “historically had high rates of abusive payments and therefore needed stricter enforcement,” during a court hearing. May House Oversight Subcommittee.
Since many low-income Americans are wage earners, these audits are generally less complex and many can be automated.
How the IRS Chooses Which Tax Returns to Audit
Currently, the IRS uses software to categorize each tax return with a numerical score, with higher scores being more likely to trigger an audit. The system can flag a return when deductions or credits against income fall outside acceptable ranges.
For example, say you earn $150,000 and claim a charitable deduction of $50,000. You’re more likely to be audited because it’s “out of proportion” to what the system expects, said Lawrence Levy, president and CEO of tax resolution firm Levy and Associates.
Other red flags for an IRS audit may include unreported income, refundable tax credits such as the EITC, deductions for home office or automobile, and rounded numbers on your return, experts say.
How IRS Audits May Change With More Funding
While the legislation still needs to be approved by the House and signed into law, it will take time to phase in funding, hire and train new workers.
The IRS aims to hire about 87,000 new officers, according to the Treasury Department.
New auditors can complete a six-month training program and receive cases worth a few hundred thousand dollars rather than tens of millions, Levy said.
“You’re not going to give a new intern to General Motors, for example,” he said. “It just won’t happen.”
The likelihood of an audit may increase for independent taxpayers, Levy said, depending on their performance. However, the odds may not change for traditional workers with an error-free ranking, he said.
“The W-2 employee is far less likely to be audited than a freelancer, in my opinion,” Levy said.
Of course, one of the best ways to avoid future headaches is to keep accurate records with detailed accounting and keep all receipts, he said.