In July 2022, 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). This updated proposal, now known as the “Inflation Reduction Act of 2022,” has sparked widespread debate and analysis.
Key Provisions of the Inflation Reduction Act of 2022
The original BBBP, with its $2 trillion price tag, passed the House of Representatives in fall of 2021. But it stalled in the Senate due to opposition from Manchin and another centrist Democrat, Arizona’s Kyrsten Sinema.
The Democrats have rebranded the proposal as the “Inflation Reduction Act of 2022,” which aims to spend around $369 billion to help achieve the Biden administration’s climate and energy goals. Another $64 billion is earmarked for extending health insurance subsidies for 13 million lower-income Americans.
To fund this new spending, the bill proposes a 15% minimum tax on approximately 200 corporations that generate $1 billion or more in profits each year. This tax would be applied against the earnings the corporations report to investors (“book income”) rather than those reported to the IRS. Democrats claim these changes will raise $313 billion over the next decade, although some economists are skeptical about the effectiveness of this proposal.
The IRS and Enforcement Challenges
Despite the new revenue measures, the current 21% corporate tax rate will not increase to 28%, as proposed in the original version of the BBBP. Additionally, the plan does not include a key progressive demand—congressional approval of the 15% “global minimum tax” agreed to by more than 130 countries last year.
The IRS will have its hands full enforcing these new provisions. The agency is already struggling with its current workload, including a backlog of 35 million tax returns for 2021 that it has not yet processed. Furthermore, only 7% of phone calls to the IRS ever reach an “assistor.”
To help cope, the Democrats’ proposal retains a provision from the BBBP to allocate $80 billion to the IRS over the next decade, with $46 billion specifically earmarked for enforcement.
Impact on Audits: Small Businesses and Lower-Income Households
Under the version of the BBBP that passed the House last year, the IRS planned to use the additional funding 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 that this additional funding will allow the agency to raise more than $300 billion in revenue.
But it won’t just be the “rich” who are targets. Half of the new audits will be of households reporting less than $75,000 in annual income. In 2019, IRS Commissioner Charles Rettig admitted that the agency targets tax returns filed by poor taxpayers because it’s “easier and cheaper” than auditing the rich.
The IRS has also announced plans to increase small business audits by 50%, focusing particularly on businesses that conduct most or all of their transactions in cash. Bars, restaurants, hair salons, and other service-based businesses are now in the IRS’s crosshairs.
The IRS’s Broad Powers and Audit Practices
The IRS is notorious for its powerful collection practices, which do not require the agency to demonstrate the accuracy of its determinations before imposing taxes. To collect on these assessments, the IRS may, without a trial or judgment:
- Seize your personal residence and auction it off to pay taxes the agency claims you owe. Property exempt from seizure under state laws, such as homestead statutes, is not 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. 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. More than 400,000 Americans are now marooned in the United States due to this provision, unless 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 the lien’s imposition. Property you own or are deemed to own is subject to seizure by “any means.”
- The IRS is also infamous for its aggressive audit practices. In some instances, IRS agents have attempted to shut down a taxpayer’s dental practice until taxes were paid or followed a taxpayer into her bathroom during an unannounced home visit.
IRS Data Security and Hiring Practices
The IRS’s data security practices have been widely criticized. Between 2007 and 2017, the agency’s data breaches increased by 100-fold. In 2015 and 2016, criminals hacked the IRS’s “Get Transcript” tool, compromising more than 700,000 taxpayer records. The hackers then filed fraudulent returns, leading the IRS to issue millions of dollars in refunds based on these fake returns.
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 from a disgruntled IRS employee. A newly-published audit by the Treasury Inspector General for Tax Administration revealed that the IRS routinely hires new employees without verifying their eligibility to work for the federal government.
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 “Tax Gap” and a Call for Simpler Tax Rules
The IRS’s paramount goal remains reducing the “tax gap,” which Commissioner Rettig told Congress could be as large as $1 trillion per year. This gap represents the difference between what the IRS believes taxpayers should be paying and what it actually collects.
Frankly, we find this enormous figure is preposterous. To the extent that the tax gap exists, it is largely due to the complexity of the Tax Code. 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.
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