Sen. Michael Bennet wants you audited.
That’s the only reasonable conclusion to draw from his repeated party-line votes in favor of the Inflation Reduction Act, aka the “Tax, Climate, and Health Care” bill, aka “Schumer/Manchin.”
The massive tax-and-spend bill recently passed out of the Senate on a 51-50 vote, with Vice-President Harris casting the tie-breaker, meaning Bennet’s yes vote was essential to clinching the deal. And while there’s confusion as to exactly what the measure is supposed to do, or even what to call it, there’s no doubt about this: the bill calls for more than doubling the size of the Internal Revenue Service (IRS), hiring 87,000 new agents over the next decade, and greatly increasing the IRS’s enforcement activity. The IRS currently has about 6,500 auditors.
A friend of mine who’s a tax accountant points out that this goal may be difficult to achieve. She notes that there’s already a shortage of accountants, so the IRS is likely either to fall short of its hiring goals, or to end up paying considerably more than it has budgeted for.
Charles Rettig, the IRS Commissioner has told Congress that citizens making less than $400,000 a year will not see an increase in audit rates. That’s a claim that has been vociferously seconded by the White House, and there are reports that Secretary of the Treasury Janet Yellin has instructed the IRS to make sure this happens.
There’s excellent reason to be skeptical. A substantial portion of the bill’s planned deficit reduction will comes from increased tax collections. The Heritage Foundation estimates that around 70% of the bill’s increased revenue will come from people making less than $400K. Without explicit increases in their tax rates, the only way to meet those revenue targets is through more aggressive collections.
It has to be this way. As a group, the wealthy are frequently audited, but also can afford attorneys and accountants to deal with challenges from the IRS. Large corporations practically have branch offices of the IRS living in their accounting departments. Somewhat surprisingly, the poor tend to get audited at a higher rate, too, because of the complexity of claiming the Earned Income Tax Credit. That leaves the middle class as the Last Frontier in IRS auditing.
Nevertheless, taking Rettig at his word, Idaho Republican senator Mike Crapo, ranking member of the Senate Finance Committee, proposed an amendment to the bill that would have ensured just that. The bill includes $80 billion in additional funding for the IRS. Crapo’s amendment would have prevented the IRS from using any of that money for audits of individuals and small businesses making less than $400,000 a year.
Sen. Bennet joined his fellow Democrats in killing that amendment on a party-line vote. Given the opportunity to prevent something they claimed wasn’t going to happen anyway, Bennet and the Democrats unanimously refused to make it explicit.
Small business should be particularly worried. For many small business owners, their revenue far exceeds $400,000, and shows up as income on their personal income taxes. Even though the net income from their business is far less, they will be required to justify every last business expense claimed on their taxes. So small business, which took it on the chin during the pandemic restrictions, suffered the most from the supply chain disruptions, and is disproportionately affected by inflation, will take it in the shorts again from this bill.
So not only will they increase taxes on those making less than $400,000, they’re going to make sure you pay every penny of it, and more.
Sometimes an audit is a request for some documentation about a particular line item or deduction. That’s not so bad, although the prospect of having a deduction denied in the morning can concentrate the mind wonderfully. But other times, they are full proctological exams, and can rack up the late fees and penalties steeply and quickly.
People who say that if you just fill out an honest return then you have nothing to fear either have never been through an audit or are hoping to represent you in one. The tax code is so lengthy and complex that you can’t simply program it into a computer and get the right answer. You can ask former treasury secretary “Turbo Tax” Tim Geithner about that.
Much of the tax code contains judgment calls about allowances and deductions. It is also rife with conflicting provisions, one of which needs to be chosen to get to a bottom line. Some questions are so complex that calling the IRS hotline three different times may result in three different answers, if you can even get through to a human being. The IRS itself reports that only about 10% of calls do.
That’s the bad news. The worse news is that having relied on one of the three answers is no defense when the auditor decides differently.
Joshua Sharf is a senior fellow in fiscal policy at the Independence Institute, a free market think tank in Denver.
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