Yellen outlines planned changes to IRS in $80B overhaul

Minister of Finance Janet Yellen on Thursday detailed some of the Biden administration’s plans for the Internal Revenue Service as part of an $80 billion funding boost, including expanding personal services.

Speaking at an IRS facility in New Carrollton, Maryland, Yellen said the funding will help improve the IRS in the form of better technology and taxpayer services and stronger enforcement focused on wealthy Americans and businesses.

“The Inflation Reduction Act finally provides funding to transform the IRS into a 21st century agency,” Yellen said. “While not all of the improvements will be implemented overnight, taxpayers can expect to feel real differences during the next filing season.”

The funding was included in the Democrats’ health and climate spending bill — called the Inflation Reduction Act — that Biden signed last month.

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Janet Yellen, pictured here, holds a news conference in the Cash Room of the US Treasury Department in Washington, US on July 28, 2022. (REUTERS/Jonathan Ernst/Reuters Photos)

Yellen said the money will go toward increasing services at IRS Tax Assistance Centers and expected those centers will have the capacity to help about 2.7 million Americans in the coming filing season, compared with about 900,000 now.

In addition, she said the IRS will hire about 5,000 customer service representatives to improve the IRS’s answering service. (Currently, the IRS has only been able to answer about 2 out of 10 phone calls).

Providing the IRS with an influx of funds has been a top priority for Democrats and emerged as one of the most prominent financiers of the $739 billion bill. But it has sparked a fierce backlash from Republicans, who say a beefed-up IRS could ultimately hurt lower-income Americans.

Internal Revenue Service (IRS) headquarters in Washington, DC, USA, on Friday, February 25, 2022. (Photographer: Al Drago/Bloomberg via Getty Images / Getty Images)

That’s because the IRS disproportionately targets low-income Americans when they conduct tax audits each year. In fact, households making less than $25,000 a year are five times more likely to be audited by the agency than all others, according to a recent analysis of tax data beginning in fiscal year 2021 by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University.

The reason for that is an increase in what are known as “correspondence audits,” meaning the IRS conducts reviews of tax returns via letters or phone calls rather than more complex face-to-face audits. Only a fraction – 100,000 of the 659,000 audits in 2021 – were carried out in person.

According to the Syracuse study, more than half of the correspondence audits initiated by the IRS last year — 54% — involved low-income workers with gross receipts of less than $25,000 who claimed the tax credit, an anti-poverty measure.

The discrepancy is primarily because high-income taxpayers have complex investments that can easily cover the gaps between tax owed and paid vs. reported and paid tax.

President Joe Biden after signing into law HR 5376, the Inflation Reduction Act of 2022, in the State Dining Room of the White House on August 16, 2022. ((Photo by Demetrius Freeman/The Washington Post via Getty Images) / Getty Images)

Yellen has pushed back against those fears, reiterating Thursday that she directed the IRS not to increase audits of households making less than $400,000 annually.

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“Importantly, I have directed that enforcement resources will not be used to raise audit rates for households earning below $400,000 a year over historical levels,” she said. “In fact, we expect audit rates for honest taxpayers to decrease once the IRS has the right technology infrastructure in place. This means a simpler tax filing season for taxpayers who are doing everything right.”

Revenues from the policies will go to initiatives designed for combat climate change and cap drug prices as well as efforts to reduce the nation’s $30 trillion debt. That includes about $433 billion in new spending, while about $300 billion of the new revenue will go toward paying down the nation’s deficit.