Answers to Questions About the “Inflation Reduction Act” and the IRS

Tax form with audit stamp

With the passage of the “Inflation Reduction Act” in the Senate recently, many questions have been raised about the portions of the bill that have to do with the IRS. As of this writing, the bill has not been signed into law by the president, but we can examine some of the questions from the standpoint of a firm that has decades of experience working with the IRS on behalf of taxpayers with a variety of tax situations.

Question: Will my chances of being audited increase once the “Inflation Reduction Act” becomes law?

Answer: Possibly. A letter reportedly sent by Treasury Secretary Janet Yellen on Wednesday directs the Internal Revenue Service not to use any of the new funding allocated in the “Inflation Reduction Act” to increase the chances of Americans making less than $400,000 a year getting audited. This report on emphasizing high-income earners for audit contradicts a study published in “Tax Notes” by Kim M. Bloomquist, who served as a senior economist with the IRS’ research division for two decades that indicates that more than a third of all audits are of earned income tax credit, or EITC recipients. The included data covers the total number of income tax filings and the estimated number of audits per county for the combined tax years 2012-15. A map of Mr. Bloomquist’s data indicates that the number of audits in each county largely reflects how many taxpayers there claimed the credit. This article contains a map showing the frequency of audits by county in the United States over the period studied.

So, if you go by historical trends, people who take the EITC and who perhaps don’t compute it correctly or who claim it incorrectly are the most likely to be audited, and these people earn far less than 400,000 dollars annually.

Question: How many people earn more than $400,000 per year?

Answer: According to the IRS, an annual household income of $400,000 or more represents America’s top 1.8% income-earners. Per IRS Publication 6292, there were 154 million tax returns filed in 2019; thus approximately 2.8 million people earn over $400,000. The numbers may be different after the COVID-19 lockdowns and resulting business closures.

Question: Where did the number “87,000 agents” come from in the “Inflation Reduction Act”?

Answer: The Treasury Department estimated in 2021 that a nearly $80 billion investment in the IRS could allow the agency to hire 86,852 full-time employees over the decade. But that figure accounts for all workers, not solely enforcement agents. IRS Commissioner Charles Rettig testified before Congress that the IRS would need to hire 52,000 people over the next six years to maintain the current staffing level to replace those who retire or otherwise leave.

Question: So, what are the increased audits expected to do?

Answer: According to statements by various Democrat politicians, the increased IRS funding is projected to raise $124 billion in additional tax revenue over the next ten years. The increased payments to the IRS are a crucial way Democrats plan to offset the cost of their plan to lower prescription drug costs and combat climate change called for in the “Inflation Reduction Act.”

So, what should you do as a person who pays taxes anywhere in the United States?

It is abundantly clear that some Democrat politicians believe that there is widespread tax noncompliance in the United States, and they are arming the IRS with funding for better computer systems and many more agents throughout the IRS to find those who purportedly haven’t paid “their fair share.” If you claim the EITC or earn more than $400,000 per year, you can expect to have your returns scrutinized even more carefully by the IRS since “that’s where the audit money is.”

The Sterbick Law Firm has long experience with the IRS and has seen many changes over the years. We are confident that our knowledge of the law and abilities to understand the IRS process will help you if you find yourself in an audit situation or if the IRS sends a letter demanding unpaid taxes. If you find yourself in a tax situation, don’t wait. Contact the Law Offices of John Sterbick right away for a free consultation. Let us help you; we offer competent representation that you can trust anywhere in the U.S.