“I direct that any additional resources… shall not be used to increase the share of small businesses or households below the $400,000 threshold that are audited relative to historical levels,” Treasury Secretary Yellen wrote to IRS Commissioner Charles Rettig.
That directive has been used by media “fact checkers” to deny that the massive increase in IRS personnel under Biden’s Inflation Increase Act will also increase audits of the middle class.
Yellen’s statement initially seems reassuring until you look closely at its curious language.
Treasury Department spokeswoman Julia Krieger used the same phrasing when claiming that “audit rates relative to historical norms for people earning under $400,000 each year” would not increase.
“Historical” is an interesting term. Media fact checkers act as if it means current rates. But if it means current rates, Yellen and the Treasury spokeswoman could have just said so. The specific use of “historical norms” by both women is not an accident: it’s policy.
What’s the difference between “current rates” and “historical levels”?
A Government Accountability Office (GAO) report noted that from 2010 to 2019, audit rates dropped from “0.9 percent to 0.25 percent” due to “reduced staffing as a result of decreased funding”. Audit rates for taxpayers earning from $25,000 to $500,000 were even lower at 0.17%.
Would “historical norms” cover 2010? It’s hard to believe that they would not. Even the most generous interpretation of Yellen’s language is that IRS audit rates would significantly increase.
At 0.25 percent, 1 in 400 taxpayers might be audited while at 0.9 percent, that number would climb catastrophically to 1 in 111. That’s still a range, but it’s a markedly smaller one.
And Americans will be four times more likely to be audited after the Biden-Manchin bill.
Taxpayers earning between $75,000 and $100,000 had their audit rates drop 30%. Those making from $200,000 to $500,000 had theirs fall 72%.
A 72% increase in middle class audits would then be well within “historical norms”.
And that’s just the beginning.
History goes back a long way. How far back do Biden and Yellen’s “historical norms” for audits go?
IRS audit rates have been falling steadily for some time. A study on the IRS site notes that, “In the early 1960’s, the percentage of individual tax returns that were audited by the Internal Revenue Service (IRS) was about 6 percent, and this percentage fell to 2.5 percent by the mid-1970’s.”
A 6% audit rate would take us from 1 in 400 to audits of 1 in 17 taxpayers.
Another historical difference is that $400,000 back then looked very different than it does now.
As the Tax Foundation describes, “The top marginal tax rate in 1960 was 91%, which applied to income over $200,000 (for single filers) or $400,000 (for married filers)”.
If Yellen were to apply 1960’s “historical norms” to audit rates today, would they be the same rates at which people earning the top marginal tax rate were audited back then?
Writing to Senate members, Commissioner Rettig used a more specific term, that Yellen then repeated, that “audit rates will not rise relative to recent years for households making under $400,000 annually.” Recent years appear to preclude the 1960s. Or so one would think.
But are 1960s audit rates the direction that Yellen and the IRS would eventually like to go?
As of 2017, the IRS had 9,510 auditors on the job. Defenders of the agency credited the decline in audits to the decline in auditors. They will often point out that there were 12,553 auditors in 1960, and over 15,000 later in the decade. The rise in auditors paralleled a rise in audits.
The decline in auditors then mirrored a decline in audits.
For now, Yellen holds out the possibility of a return to 2010 rates when the IRS budget ballooned under the greedy eye of the Obama administration which had set out to destroy the middle class by robbing and taxing them to death while destroying the economy. IRS advocates blame Republicans for “defunding” the IRS by rolling back Obama’s surge of spending.
The accounts from the IRS, Treasury personnel and non-profit analysts over the years have formed a perfectly clear picture of an agency whose audit rates have fallen off because of a lack of personnel. Since a majority of audits are directed at working class and middle class people, there is no reason to think that an increase in audits won’t be directed at the population which holds most of the nation’s money and yet is able to offer the least legal resistance.
IRS personnel have written and testified that auditing corporations and the wealthy offers the most challenge and takes the most time. Given more staff, they’ll chase the easiest targets, the ones least likely to be able to afford to wage legal battles, and the easiest to intimidate.
Given a choice between hunting big game and casting a wide net, the latter will win out.
Using the term “historical” suggests that Yellen and her cohort consider the current low audit rates to be an aberration that they intend to remedy. There’s nothing reassuring about a call to return to a “historical” period when audit rates might quadruple or even increase by 3200%.
“We are the greatest country in the world, yet the agency that touches more Americans than any other continually struggles to receive sufficient resources to fulfill its important mission,” IRS Commissioner Charles Rettig wrote.
It is probably true that the IRS “touches” more Americans than any other agency. Few Americans though wanted to be touched. And thanks to Joe Biden, who has spent his career on the unwanted touching of women and girls, more Americans than ever will be “touched”.