On January 9th, 2023, the House of Representatives passed a bill rescinding $80 billion of additional funding for the Internal Revenue Service (IRS) that was previously passed by Congress and signed into law as part of the Inflation Reduction Act of 2022. This new bill was passed strictly along party lines, meaning that Republicans favor removing the funding while Democrats oppose this change. For this reason, the bill is not expected to get past the Senate, which is controlled by the Democratic party. However, it begs the question of what is happening between the IRS and Congress.
Poole College accounting professors Nathan Goldman and Christina Lewellen examine the potential impact…
To provide some context, the IRS’s funding has declined over time. This decline has led to lower audit rates, longer turnaround times for responding to questions and processing returns, and continued reliance on aging technology. In response to a continued call for more resources, Congress allocated an incremental $80 billion in funding as part of the Inflation Reduction Act of 2022. This funding is designated to clear the backlog of unprocessed tax returns, improve customer service, overhaul the agency’s technology systems, and hire IRS employees to replace retiring workers.
The Congressional Budget Office expects this $80 billion investment to increase tax collections by approximately $200 billion.
Many House Republicans view this funding skeptically as they conjectured that it would substantially increase the number of IRS agents who would audit taxpayer returns. These representatives feel the additional funds, and the related increase in IRS agents, will increase targeted audits and scrutiny over everyday Americans. In fact, many of these representatives ran for election with campaigns promising they would fight to remove the $80 billion in additional IRS funding if elected.
Given that this is a political debate, both opposing parties have valid arguments.
As asserted by the Republicans, more people will be audited. For many taxpayers, the IRS relies on voluntary reporting of financial information with the threat that you may be audited. As this threat decreases, the gap between what taxpayers should be paying and what they actually pay increases.
The additional funding will be used to apply more scrutiny, which will result in more people dealing with the IRS. In turn, this explains why an $80 billion investment is expected to generate approximately $200 billion in incremental tax collections.
The additional funding will be used to apply more scrutiny, which will result in more people dealing with the IRS. In turn, this explains why an $80 billion investment is expected to generate approximately $200 billion in incremental tax collections.
As asserted by the Democrats, the additional scrutiny is only expected to apply to higher-earning taxpayers, defined as those earning more than $400,000. In fact, under the current system, taxpayers of lower incomes face unjustly high audit rates because lower-income taxpayers are simply easier to audit.
The additional funding will increase the IRS’s ability to audit complex tax returns. The additional money will also be used to modernize our tax system infrastructure. The additional funding is also expected to make it easier for taxpayers to contact the IRS, as well as have their returns processed at a faster rate.
In the end, the proponents of the $80 billion increase in IRS funding does not appear to be some army of strongly left-wing Democrats attempting to target political opponents. To the proponents’ credit, removing this money will benefit wealthy taxpayers and corporations far more than the lower and middle class. Neither is the additional funding expected to negatively affect small business owners and middle America, as claimed by many politicians spearheading the defunding movement. And, unfortunately, removing this money will also benefit those who have greater funds available to engage in savvy tax planning. It appears that the primary purpose of the proposal may be to make a political statement because the Republicans know that it is unlikely to garner enough support to pass the bill in the Senate.
Last but not least, recent suggestions by House Republicans to implement a national consumption tax (sales tax) in lieu of an income tax and completely remove the IRS raise significant concerns with regard to the principles underlying good tax policy.
First, a consumption tax would tax all taxpayers at the same rate regardless of their income levels. Therefore this tax would violate the vertical equity principle that taxpayers with greater income levels, and therefore a greater ability to pay, should pay more taxes. Put differently, it is not fair to impose the same tax burden on a product for somebody who makes $20,000 vs. somebody who makes $20,000,000.
Imposing such a tax will increase income inequality, with the most adverse effects falling on lower and middle-income taxpayers, as well as small businesses.
Imposing such a tax will increase income inequality, with the most adverse effects falling on lower and middle-income taxpayers, as well as small businesses. Second, the national sales tax would not just be a negligible tax increase. Rather, this tax would cause a significant increase in the costs of all products – resulting in many individuals paying the exact same amount of taxes as they otherwise would have.
In other words, whether the money comes from your paycheck or is added to your grocery bill, you will somehow pay that money.
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