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Tax Worry: Will Inflation Reduction Act Impact Who Is More Likely To Be Audited?

Geber86 / iStock.com
Geber86 / iStock.com

If the Inflation Reduction Act passes through the House and gets sent to President Biden to sign on Friday, many questions about the Act’s vaguely termed IRS Tax Enforcement provision will still remain unanswered.

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According to the Congressional Research Service, the Act would provide the IRS with nearly $80 billion, $45.6 billion of which would go toward “tax enforcement activities.” Tax enforcement includes “activities such as hiring more enforcement agents, providing legal support, and investing in ‘investigative technology.'”

The curious might wonder how these activities would affect American taxpayers.

In a May 2021 report, the Treasury Department claimed that an $80 billion investment in the IRS, made over the course of a decade, would allow the agency to hire nearly 87,000 new employees by 2031. The new hires would include a range of positions, including support staff, IT technicians and corporate auditors, CNBC reported.

However, detractors of the IRS funding boost are equating increased enforcement measures with the potential for a significant hike in audits for those that typically and disproportionally get singled out: low- and middle-income filers.

“There are many reports showing that the IRS is auditing low-income families at a much higher rate than high-income taxpayers,” said Ways and Means Committee member Rep. Bill Pascrell (D-N.J.) at his subcommittee’s hearing in May.

“Specifically, data shows that a taxpayer with income under $25,000 is twice as likely to be audited than someone earning between $200,000 and $500,000. That disparity is an outrage,” Pascrell said, as reported by The Hill.

Addressing the issue, IRS Commissioner Charles Rettig sent a letter to Senate members on August 4, stating, “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,” Rettig added.

Treasury officials say high-earning Americans and businesses will be targeted. However, other taxpayers, like self-employed workers and people who operate cash businesses, could also face higher audit rates “because it’s often easier for these types of workers to claim deductions that they might not be entitled to or to underreport income,” CBS News reported.

The IRS audits current tax returns through a software system that can set off an alert when it finds a disproportionate deduction-to-income ratio, unreported income, vehicle and home office deductions, rounded numbers and the refundable Earned Income Tax Credit.

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The number of audits performed by the IRS decreased by 44% between 2015 and 2019, according to a Treasury report. CNBC reported that that figure includes a 75% fall off for those making $1 million or more and a 33% drop for low-to-moderate income taxpayers trying to claim the Earned Income Tax Credit.

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This article originally appeared on GOBankingRates.com: Tax Worry: Will Inflation Reduction Act Impact Who Is More Likely To Be Audited?