The New and Improved IRS?

As the report acknowledges in a table near the end, some 60% of the new funds ($47.4 billion) will go to “expanded enforcement on taxpayers.” This compares to the 9% the IRS plans for improving services or more quickly resolving taxpayer problems. The enforcement percentage will surely be higher, since much of the rest of the money will buy new technology and hire new staff for audits.

Mr. Werfel pledges that none of the money will “raise audit rates on small businesses and households making under $400,000 per year, relative to historic levels.” Yet the report fails to explain how it will abide by that pledge or what is an historic level.

The IRS promises a focus on “complex tax filings” and “high dollar noncompliance,” with particular enforcement emphasis on “large corporations,” “large partnerships,” and “high-income and high-wealth individuals.” The IRS has made similar promises in the past, only to migrate to softer targets.

Corporations and the super-wealthy hire armies of lawyers, which makes the tax yield low. The Joint Committee on Taxation has estimated that 78% to 90% of the money raised from under-reported income will come from those making less than $200,000 a year. A leading target will be “pass through” small businesses that file under the individual code. The report says the IRS will also rev up audits on returns that feature non-wage or salary income, such as estate and gift taxes.

Syracuse University’s Transactional Records Access Clearinghouse looked at tax data from fiscal 2021 and found that the IRS could keep its audit numbers from declining only by significantly increasing its “correspondence audits,” which are mailed letters that query aspects of a tax return. All but 100,000 of the IRS’s estimated 659,000 audits in fiscal 2021 were conducted with these letters. Half of all correspondence audits (54%) went to low-income wage earners with less than $25,000 in gross receipts. More such letters will be forthcoming.

The Werfel report also says the agency plans to arm enforcement teams with “advanced analytics” and “emerging technologies”—alongside an IRS promise that this snooping will happen “responsibly” and respect “taxpayer privacy and civil liberties.” Glad to hear it. The agency will also devote new resources to ensuring that taxpayers “receive the tax incentives for which they are eligible.” In other words, the agency will take on a new social-justice role in delivering welfare payments.

Republicans point to a 2021 Treasury document that says the IRS cash boost will fund 87,000 new employees. Democrats deny this. But the Werfel report admits the IRS plans to hire 30,000 more employees in fiscal 2023 and 2024 alone—including 8,782 in enforcement and 13,883 in taxpayer services. The agency already employs 79,000.

The only silver lining to the $80 billion infusion is that the agency will face a test of whether it can deliver both better service for taxpayers and the vast new amounts of revenue Democrats promised as a return on investment. Confidence is not high.