State of the Facts
The Inflation Reduction Act, which recently passed the House and the Senate, puts $80 billion toward expanding the Internal Revenue Service (IRS). More than half of the funds will go toward expanding the enforcement division that conducts audits on individual and corporate tax returns. Currently, corporations making over $20 billion are audited the least of any size company but make up the largest share of additional tax revenue from audits.
The IRS’s budget has remained about the same since the 1990s, despite processing more returns every year. The $80 billion expansion is nearly six times the size of the IRS’s current annual operating budget and expires in 2031.
The Inflation Reduction Act allocated more than $45 billion to specifically expand the enforcement department of the IRS. Enforcement is responsible for conducting both manual and automatic audits and determining additional taxes owed on underreported returns.
The bill also includes $25 billion for operational costs and $4 billion for technology upgrades.
The IRS employed 78,661 full-time workers in 2021, a decrease of about 13% over the past decade. About 39% of employees work in enforcement, which conducts reviews of both individual and corporate tax returns.
The IRS could use the Inflation Reduction Act funding to hire employees in the departments outlined in the bill, including enforcement, operations, IT, and taxpayer services.
There are three major categories of IRS compliance: math errors, automated notices, and audits (also called examinations). Prior to 2021, automated notices were the largest category of IRS compliance notifications. Confusion around the Recovery Rebate Credit which allowed people to claim missing stimulus checks, caused more than 11 million additional math errors in 2021.
Automated notices use a program to match return amounts to third-party data from employers, banks, and more. Taxes obtained via the automated programs accounted for $14.2 billion in 2021.
Audits make up the least amount of flagged tax returns in 2021, at about 748,000 audit cases closed last year. These audits generated $26.8 billion in additional tax revenue in 2021.
Of the 748,000 audits finished in 2021, more than half were on those who earned a positive income of less than $50,000 last year. The average additional tax that these returns owed was about $11,000 per audit.
In 2021, individuals who earned over $1 million were audited the least of any income group. In recent years, this income group had the least number of returns filed, at about 500,000. Those making over a million in positive income also have the largest average additional tax owed, at $121,000 per return.
Audits of corporate tax returns made up less than 2% of all examinations in 2021, yet corporate audits generated $15 billion in additional tax revenue, almost double the amount from individual tax return audits.
Large corporations made up most of that total. Audits on corporations with over $20 billion in assets made up about 75% of that additional revenue.
For more about how the Inflation Reduction Act will impact the US, explore articles about tax credits for electric vehicles, prescription drug prices, and the budget reconciliation process.
Operational costs can include rent, postage, printing, security, research and other administrative costs.
The IRS categorizes audited returns based on total positive income. It's defined as the sum of various sources of income on a tax return but it excludes losses. Therefore, some returns may be categorized in a higher income bracket because of the exclusion of losses.
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