With the announcement of the IRS receiving an additional $80 billion in funding as part of the Inflation Reduction Act, the Biden Administration moved swiftly to reassure regular Americans that these funds wouldn’t result in higher audit rates for individuals and small businesses earning under $400,000 annually. Treasury Secretary Janet Yellen’s statement sought to allay concerns and provide clarity on the administration’s stance regarding IRS audits.
However, despite these assurances, data from Syracuse University’s Transactional Records Access Clearinghouse (TRAC) revealed a concerning trend: the poorest Americans, particularly those claiming the Earned Income Credit (EIC), faced a disproportionately higher risk of IRS audits. TRAC’s analysis of tax returns highlighted a stark contrast in audit rates between low-income earners and wealthier individuals. Individuals earning less than $25,000 annually were five times more likely to undergo IRS audits compared to the broader population. Moreover, the audit rate for EIC claimants increased to 13.5% in 2022, underscoring the heightened scrutiny faced by vulnerable segments of the population.
The prospect of an IRS audit can be daunting for taxpayers, often entailing significant time and financial resources. The average individual taxpayer already incurs considerable costs, both in terms of out-of-pocket expenses and time spent, to file annual tax returns. The additional burden of an IRS audit exacerbates these challenges, potentially leading to heightened stress and financial strain for individuals and families. Private tax preparation services, recognizing the anxiety surrounding IRS audits, have capitalized on this apprehension by offering supplementary services aimed at providing peace of mind and assistance during audit proceedings. For instance, H&R Block’s “Peace of Mind” add-on service seeks to alleviate concerns by offering representation and support in the event of an IRS audit.
The issue of IRS audits and tax compliance has sparked debate among policymakers and politicians. Some, like Florida Governor Ron DeSantis, advocate for radical reforms, including the elimination of the IRS and the adoption of a simplified tax system based on a flat tax rate. Proponents argue that such measures would streamline tax processes, reduce bureaucratic inefficiencies, and ensure fairness in taxation. However, proposals for overhauling the tax system have elicited mixed reactions, with critics raising concerns about potential ramifications for government revenue, tax equity, and social welfare programs. The complexity of tax policy and the diverse needs of taxpayers underscore the challenges inherent in devising comprehensive reforms.
By presenting these aspects in a narrative format, we can offer a more detailed analysis of the implications of IRS funding, audit disparities, and policy responses for taxpayers and policymakers alike.