Tax Planning

Congress Is Set to Unleash the IRS on American Taxpayers

Last week, we learned that West Virginia Senator Joe Manchin had signed on to a slimmed-down version of President Biden’s “Build Back Better” Plan (BBBP).

The BBBP, with its $2 trillion price tag, passed the House of Representatives last fall. But it stalled in the Senate due to opposition from Manchin and another centrist Democrat, Arizona’s Kyrsten Sinema.

What the Democrats now call the “Inflation Reduction Act of 2022” would spend around $369 billion to help achieve the Biden administration’s climate and energy goals. Another $64 billion is earmarked to extending health insurance subsidies for 13 million lower-income Americans.

To help pay for this new spending, the bill would impose a 15% minimum tax on around 200 corporations that generate $1 billion or more in profits each year. The tax would be applied against the earnings the corporations report to investors (“book income”), rather than those they report to the IRS. Democrats say these changes will raise $313 billion over the next decade, although some economists are skeptical this proposal will work as planned.

But the current 21% corporate tax rate won’t increase to 28%, as proposed in the original version of the BBBP. The plan also doesn’t include a key progressive demand –congressional approval of the 15% “global minimum tax” more than 130 countries agreed to last year.

The IRS will have its hands full enforcing these new provisions. After all, the agency is far from being able to cope with its current workload. It still has 35 million tax returns for 2021 that it hasn’t been able to process. And only 7% of phone calls to the IRS are ever connected to an “assistor.”

But to help it cope, the Democrats’ proposal keeps a provision in the BBBP to hand $80 billion to the IRS over the next decade. Out of those funds, $46 billion is earmarked for enforcement.

Under the version of the BBBP that passed the House last year, the IRS would use the money to hire nearly 87,000 new agents. The goal is for a reinvigorated IRS to perform 1.2 million more audits each year. Lawmakers estimate the additional funding will allow the agency to raise more than $300 billion in revenue.

And it won’t just be the “rich” who are targets. Half of new audits will be of households reporting less than $75,000 in annual income. But at least the IRS is honest about it: in 2019, IRS Commissioner Charles Rettig admitted that his agency targets tax returns filed by poor taxpayers because it’s “easier and cheaper” than auditing the rich.

The IRS also has announced that it wants to increase small business audits by 50%. It plans to focus on businesses that do most or all their business in cash. Bars, restaurants, hair salons, and other service-based businesses are all in the IRS’s crosshairs.

And let’s not forget this is the same IRS that has some of the most awe-inspiring collection powers of any federal agency. The agency need not demonstrate its determinations are accurate before imposing taxes. To collect on these purported assessments, it may, without a trial or judgment:

  • Seize your personal residence and auction it off, using the proceeds to pay taxes the agency claims you owe. Property exempt from seizure under state laws, such as homestead statutes, isn’t immune from IRS collection efforts.

  • Seize your bank accounts, securities accounts, and property in your safety deposit box.

  • Garnish your salary, Social Security, and pension payments. The IRS has more garnishment authority than an ordinary creditor. In 2021, a single parent with two children could be left with as little as $526.92 per week.

  • Order the State Department to revoke your passport if you owe more than $54,000 in delinquent taxes, interest, and penalties. This threshold is also adjusted annually. More than 400,000 Americans are now marooned in the United States, thanks to this provision. (Unless, of course, they have a second passport.)

An uncollected tax assessment automatically imposes a lien against all your property and property rights, including all property acquired after imposition of the lien. Property you own, or are deemed to own, is subject to seizure by “any means.”

This is also the same agency that’s justifiably famous for its audit practices, including trying to shut down a taxpayer’s dental practice until he paid his tax bill. Not to mention following a taxpayer into her own bathroom during an unannounced home visit. It’s also legal for undercover IRS agents to seduce their investigative targets.

The IRS is also notorious for its feeble efforts to protect the massive amount of data it collects; up 100 times from 2007 to 2017. In 2015 and 2016, criminals penetrated the IRS’s “Get Transcript” tool, which lets taxpayers access copies of past tax returns. More than 700,000 taxpayer records were compromised. The hackers then filed new fraudulent returns requesting refunds, and the IRS issued millions of dollars of refunds based on these fake returns. Many victims of this scam only learned of it when the IRS initiated collection efforts against them.

More recently, in 2021, ProPublica published data from tax returns filed by thousands of the wealthiest people in America, including Jeff Bezos, Warren Buffett, and Elon Musk. Security experts believe the leak originated with a disgruntled IRS employee, but the IRS also has a long history of hiring incompetent workers.

Indeed, a newly-published audit by the Treasury Inspector General for Tax Administration concluded that the IRS routinely hires new employees without even verifying they are eligible to work for the federal government. It reports:

IRS hired individuals to fill positions the majority of which would have had access to taxpayer data yet never verified whether those individuals were eligible for Federal employment in the United States.

Commissioner Rettig recently boasted that at recent IRS job fairs, the agency had hired 2,500 clerks and tax examiners. About 90% of those who applied were hired, according to Rettig. This doesn’t give us high hopes for higher security standards at the agency.  

The IRS’s paramount goal, as always, is to reduce the “tax gap,” which IRS Commissioner Rettig told Congress last year could be as large as $1 trillion per year. This is the difference between what the IRS thinks taxpayers should be paying and what it collects.

Frankly, we find this enormous number preposterous. To the extent that the tax gap exists at all, it’s mainly because of the insane complexity of the Tax Code. Nina Olson, the IRS’s former taxpayer advocate, told Congress in 2006 that in 94% of audits, IRS examiners found no willful tax evasion – only inadvertent errors by taxpayers and their advisers who simply don’t understand the monstrously complex rules.

Instead of worrying about a tax gap that is largely the result of a Tax Code no one understands, why not simplify the rules? Sadly, that seems unlikely to occur, since politicians of both parties are only too eager to mold the Tax Code to fit the needs of their constituents. And the Inflation Reduction Act of 2022 is only their latest effort.

Plan B, anyone?

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