21 Nov 2022
Congress passed on 12 Aug 2022 and President Biden
signed into law on 16 Aug 2022 the “Inflation Reduction Act”. Part of this law provides $80,000,000,000 to
the IRS to fund modernization and increased tax enforcement. Those who voted
for this bill did so (if they read it) expect to obtain additional revenues as
follows [1]: a) $181,000,000,000 from improved tax enforcement; b)
$74,000,000,000 from a 1% excise tax on stock buybacks; c) $222,000,000,000
from a 15% corporate minimum rate on companies with $1,000,000,000,000 in
revenue; and d) $53,000,000,000,000 from an extension of the limitation on excess
business losses. These values total to
$530,000,000,000 over ten years. If so,
these projections admit that it will cost 15 cents to obtain each additional
dollar, which is a very high 15% collection expense ratio. For comparison, the IRS’ current annual
expenditure for FY 2021 [2] was $13,700,000,000, and its collections in FY 2021
were [3] $4,900,000,000,000, which represents a collection expense ratio of
0.27%. That difference alone should
convince you that this is not about additional revenue.
Part of the $80,000,000,000 is to be devoted
to hiring 87,000 new IRS employees, but the type of employees was left to IRS
discretion. According to the IRS [4], it
has already hired 4,000 new customer service employees to help answer the phone
and assist taxpayers with questions, and it plans to hire another 1,000 before
1 Jan 2023. According to another IRS
statement [5], the IRS is developing a plan on how to spend the remainder of
the $80,000,000,000. Commissioner Rettig
also sent a letter to members of the Senate [6], stating in part:
“These resources are absolutely not about increasing audit
scrutiny on small businesses or
middle-income Americans. As we’ve been planning, our investment of these enforcement resources
is designed around the Department of the Treasury’s directive that audit rates will
not rise relative to recent years for households making under $400,000. Other
resources will be invested in employees and IT systems that will allow us to better serve
all taxpayers, including small businesses and middle-income taxpayers. Enhanced
IT systems and taxpayer service will actually mean that honest taxpayers will be
better able to comply with the tax laws, resulting in a lower likelihood of being audited and
a reduced burden on them.”
Notice that the Commissioner cited Treasury
Secretary Janet Yellen’s directive to maintain the audit rate on persons making
less than $400,000 annually to the historical norm. Notice that Secretary Yellen did not instruct
Mr. Rettig to ensure that the audits are non-partisan; she only instructed him
to ensure the overall rate is within historical norms. We can have high
confidence that, since Lois Lerner is the patron saint of the IRS, the audit
rate for non-Democrats is going to be increased dramatically. It is worse than that: Secretary Yellen does
not require Commissioner Rettig to prove that the overall audit rates are within
historical norms; it is merely a directive.
This legislation gives the IRS a lot more power; but power does not confer
confidence in the institution, which is the IRS’ real problem.
How can a corrupt politically-motivated
government agency be reformed? There are
three things that seem like good ideas, but are impractical. First, the IRS cannot be abolished so long as
the government requires revenue, and every government requires revenue to carry
out its legitimate functions. Second, individuals
will be subject to audits so long as our tax code is based on the income tax
(personal and businesses). No one in
Congress is going to vote to repeal the individual income tax, so audits of
individuals will continue indefinitely. Third,
the IRS is not going to give up any of its powers; in fact it will likely petition
Congress for an expansion of its powers.
Any plan to promote the public’s confidence in the IRS must operate
under these constraints. The best that
can be hoped for is to ensure that those who are examining our returns for
compliance and auditing regular taxpayers are themselves paying their
taxes. In other words, it is necessary
that all IRS employees be audited for tax law compliance. It will not guarantee that IRS audits of
regular taxpayers are non-partisan, but at least we can have confidence that the
partisans in the IRS are subject to the same scrutiny.
However, audits of IRS employees must be
conducted a little differently than IRS audits of regular taxpayers. We cannot have a situation in which one IRS
employee “audits” another IRS employee, as the opportunity for
evasion and cheating is too great (remember the core problem here). The audits
are not intended to be punitive; they are designed solely to ensure public
confidence that those who enforce the law are equally subject to it. An IRS audit system should be set up along these
guidelines.
1.
Every IRS employee (save for a few, such as the janitorial staff, who
have no contact with taxpayers or with tax forms), shall be audited every three
years, and said audits shall cover the past three tax years. About 57,000 audits will be required each
year, since the number of IRS employees will be about 185,000 after all the new
hires are brought on.
2. The
auditors shall not be current or former IRS employees, and shall have no
first-degree relatives (siblings, aunts, uncles, cousins, or children) who are
currently employed by the IRS.
3. Any
IRS employee subject to such audits found to be in arrears on tax payments
(excluding extensions and other allowances per the current law, same as other
taxpayers) shall be permitted an appeal. Said appeal shall be finalized within
30 days of the initial audit findings.
If the appeal shows that the IRS employee is in fact delinquent on their
taxes, they shall be dismissed with prejudice (ineligible for future
employment) within 24 hours. There shall
be no managerial discretion permitted regarding dismissal. Payments on delinquent taxes shall follow the
current guidelines per the existing law, same as all other taxpayers.
4. The statistics of the audit shall be
published annually, noting how many audits were conducted, how many were found
in compliance, how many were not, and the locations in which those dismissed
resided (by State and county only).
References
[1] Analyses as cited in: httpss://en.wikipedia.org/wiki/Inflation_Reduction_Act_of_2022
[2] httpss://www.irs.gov/statistics/irs-budget-and-workforce
[3] FY 2022 IRS Agency Financial Report, (Form
5456), available at: httpss://www.irs.gov/pub/irs-pdf/p5456.pdf
[4] httpss://www.irs.gov/newsroom/irs-quickly-moves-forward-with-taxpayer-service-improvements-4000-hired-to-provide-more-help-to-people-during-2023-tax-season-on-phones
[5] httpss://www.taxpayeradvocate.irs.gov/news/tas-tax-tip-what-the-inflation-reduction-act-means-for-you/
[6]
Commissioner Rettig to Members of the United States Senate, 4 Aug 2022;
available at:
httpss://www.irs.gov/pub/irs-utl/commissioners-letter-to-the-senate.pdf