At a U.S. Senate Finance hearing, Daines discusses how burdensome audits have potential to hurt all Americans
U.S. SENATE – U.S. Senator Steve Daines today slammed the Biden administration for spending $80 billion to supersize the Internal Revenue Service (IRS) to target low to middle-income earners in Montana with burdensome audits.
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Daines: I’d like to begin my time by addressing the flawed notion that the inflation Reduction Act’s $80 billion in supplemental funding to the IRS will somehow spare ordinary Americans from increased audits. For years, my Democratic colleagues have called for the IRS to reduce the tax gap, the difference between total taxes owed and collected by targeting wealthy tax cheats.
Fortunately, we still have some common sense in Montana. Montanans know that the most dangerous words in the English language are, “I’m from the IRS and I’m here to help you.” They know the IRS can’t handle the workload it currently has so adding more money to enforcement before we get folks to answer the phones is fruitless. The other problem is low to middle-income earners represent the major source of underreported income. According to the nonpartisan Joint Committee on Taxation as much as 90 percent of the money raised from under-reported income would likely come from those making less than $200,000 a year, with only four to nine percent coming from those making more than $500,000. Again, that’s from JCT. The nonpartisan GAO also found that most of the revenue generated from audits over the last decade has come from returns with incomes below $200,000. In fact, when given a chance to guarantee the IRS couldn’t use additional funding to audit taxpayers, earning less than $400,000 Every Senate Democrat voted against it. With nearly 60 percent of the IRS’ supplemental funding going to tax enforcement, audits are unfortunately coming for Americans at all income levels. More aggressive IRS enforcement is likely to increase costs for honest taxpayers who are forced to spend time, a lot of emotional energy, defending themselves against erroneous audits.
Daines asked witness Mr. Chris Edwards of the Cato Institute about the toll these often unwarranted IRS investigations are taking on American taxpayers who haven’t even broken the law.
Daines: Mr. Edwards in your testimony you state and I quote, “IRS auditing imposes collateral damage because many audited taxpayers have paid the correct amount.” What are some of the external consequences that taxpayers face as a result of the IRS’ increased enforcement?
Edwards: We all want to increase compliance rates and you know, there’s two ways you can do it. You can improve the IRS, you can keep tax rates low, you can simplify the tax code. All of those strategies would, you know, it would save taxpayers money and you’d increase in compliance. Yes, you can you can increase compliance with higher, well, higher audit rates but there, are as you said, there would be collateral damage on the many people who get audited, go through all the, all the anguish, the lawyer costs and all that financial uncertainty and they paid the correct amount. And as I said, there’s an interesting GAO study on auditing last year, they have a chart showing a decade ago when audit rates were higher on the top income category above $5 million, 60 percent of the time there was no change on audits for those taxpayers, meaning the IRS, even though they target with algorithms, they made a mistake, 60 percent of the time and went after the wrong people. So you know, I don’t know what the exact right audit rate is. But the more you audit, the more mistakes the IRS will make.
Daines: Mr. Edwards in your testimony, you touched on this—on the prevalence of so called “no change audits,” in which the IRS audits taxpayers only to find out that they paid the correct amount. In fact, you stated that for individuals earning more than $5 million dollars, the no change rate is just under 40 percent, meaning in 40 percent of these cases, the IRS is spending it’s time and resources, forcing individuals exhaust their own time and resources for no reason. Mr. Edwards, the Biden administration has said that the enforcement budget will only go towards auditing high income taxpayers. I think we’ve already demonstrated that this is at best a flimsy claim. But let’s say that’s true for a moment. Is it really good outcome for anyone but tax attorneys to have the IRS increasing taxpayer costs and stress by forcing them to defend themselves and these audits.
Edwards: That’s right. So that’s a GAO statistic that for the very top end people, 40 percent of audits, there’s no change. And even the returns where there are changes, a lot of those get abated. Some of them go to tax court and in tax court as I noted, the IRS has only got about a 50-50 batting average. So there’s a lot of people, the more you audit, there’s a lot of people have to go through a lot of time and expense and financial anguish and lawyer fees to defend themselves when they’ve done nothing wrong.