By Naveen Athrappully
The IRS announced it was planning on pursuing “high-income individuals evading taxes” and claims to have made millions in recoveries at a time when the agency is increasingly facing heat for targeting a higher percentage of lower-income Americans as part of its tax audits.
“The IRS is working to ensure that high-income filers pay the taxes they owe,” the Internal Revenue Service (IRS) said in a news release on Friday. “Prior to the Inflation Reduction Act (IRA), more than a decade of budget cuts prevented IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is now taking swift and aggressive action to close this gap.”
“In recent months, our Criminal Investigation team has closed a lengthy list of cases where wealthy taxpayers have been sentenced for tax evasion, money laundering and filing false tax returns.
“Instead of paying taxes, these evaders spent money owed to the government on gambling at casinos, vacations and the purchase of luxury goods. For example, in one case alone, the person was ordered to pay more than $6 million in restitution.”
According to the IRS, they have closed around 175 delinquent tax cases for millionaires in the last few months, generating $38 million in recoveries. “This is just the start. We will continue to go after delinquent millionaires as we ramp up enforcement capabilities through the IRA.”
The IRS claims it has recently identified around 100 high-income individuals who were living in Puerto Rico without real residency for the purpose of securing potential tax breaks. The agency is also looking into taxpayers making use of Washington’s treaty with Malta to “improperly” claim tax exemptions.
“The IRS of today is laser-focused on holding our highest-wealth filers, millionaires and billionaires, accountable for what they owe,” Commissioner Danny Werfel told reporters in a briefing.
The Inflation Reduction Act, passed last August, had set aside $80 billion for the tax agency over a period of ten years to boost enforcement as well as improve operations and service.
Some of the funds have been clawed back as part of the debt ceiling deal between Republicans and Democrats.
The IRS’ targeting of millionaires comes as the agency has been under scrutiny for allegedly focusing on taxing lower-income families rather than wealthy ones.
In a Jan. 4 post, Transactional Records Access Clearinghouse (TRAC), a nonprofit data research center at Syracuse University, pointed out that “the taxpayer class with unbelievably high audit rates—five and a half times virtually everyone else—were low-income wage-earners taking the earned income tax credit. This credit is provided to offset the taxes for the lowest wage-earners in the country.”
The IRS’ rate of income tax audit per 1000 stood at 12.7 for lowest income wage earners in fiscal year 2022. But for everyone else, the rate was just 2.3.
IRS’ Focus On Low-Wage Earners
In a 2021 annual report (pdf) to Congress, National Taxpayer Advocate Erin M. Collins pointed out that in fiscal year 2019, over half the taxpayers that IRS subjected to correspondence audits only had total positive incomes of less than $50,000. “These taxpayers often face particular challenges navigating the correspondence audit process,” the report said.
Low-income wage earners “have historically been targeted not because they account for the most tax under-reporting, but because they are easy marks in an era when IRS increasingly relies upon correspondence audits yet doesn’t have the resources to assist taxpayers or answer their questions,” TRAC said.
TRAC pointed out that the IRS audits of millionaire taxpayers have fallen over the past decade. In 2012, 40,965 such taxpayers were audited by the IRS. By fiscal 2020, the number fell to 7,108.
Meanwhile, the Democrat-backed IRA has faced criticism, with some arguing that the bill will increase IRS’ taxation focus on the middle and lower-income classes.
Before passing the bill in August, an amendment was proposed by Sen. Mike Crapo (R-Idaho) stipulating that none of the $80 billion funds from the IRA set aside for the IRS could be used by the tax agency to audit taxpayers making less than $400,000 annually. The amendment was voted against by all 50 Democrat senators.
In a letter to IRS Commissioner Charles P. Rettig, Treasury Secretary Janet Yellen wrote that the new funding “shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels.”
However, as her directive is not in the bill, Yellen’s words do not have the force of law. “This has no teeth behind it,” said Preston Brashers, a senior tax policy analyst with The Heritage Foundation.
Rep. Kevin Brady (R-Texas) has estimated that the IRA can potentially amount to 1.2 million new taxpayer audits each year, out of which over 710,000 would be Americans making $75,000 or less annually.
