IRS to start spending new $80 billion budget from Democrats

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The Internal Revenue Service is poised to start spending the $80 billion funding that it received as part of Democrats' sweeping health care and climate change spending bill.

Providing the IRS with an influx of funding has been a top priority for Democrats and emerged as one of the most prominent financiers of the Inflation Reduction Act that President Biden signed into law last week. But it has elicited a fierce pushback from Republicans, who say that a beefed-up IRS could ultimately hurt lower-income Americans. 

The tax-collecting agency is expected to use the first chunk of money from the bill to hire people who will answer taxpayers' phone calls during the 2023 tax season.

Recently, only about one in 10 callers has been getting through to the IRS, according to National Taxpayer Advocate Erin Collins. The IRS received an estimated 73 million telephone calls from taxpayers seeking help or guidance during the most recent filing season.

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Internal Revenue Service Commissioner Charles Rettig testifies before the House Ways and Means Oversight Subcommittee on March 17, 2022, in Washington, D.C. (Kevin Dietsch/Getty Images / Getty Images)

It is unclear how many agents the IRS intends to hire. The agency will use part of the $3.2 billion in service funding to onboard the new workers, according to Natasha Sarin, the Treasury Department official who is helping to implement the changes.

"We both have to invest in the pieces that are immediate salves at the same time that we’re investing for the long term," she told the Wall Street Journal.

The move comes just one week after Treasury Secretary Janet Yellen directed the agency to develop an operational plan for deploying the new funding that includes details about how the money will be spent over the next decade, with specific operational initiatives and associated timelines.

"The work will require an all-hands-on-deck approach from the dedicated employees of the IRS," she wrote.

Yellen laid out her top priorities in the memo — a copy of which was obtained by FOX Business — which included clearing a backlog of unprocessed tax returns, modernizing IRS technology, improving taxpayer services and hiring "at least" 50,000 new employees over the next five years.

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President Joe Biden signs the Inflation Reduction Act of 2022 into law at the White House on Aug. 16, 2022. (Demetrius Freeman/The Washington Post via Getty Images / Getty Images)

However, Republican lawmakers have been quick to criticize the new funding, warning that a stronger IRS could lead to increased audits on lower- and middle-income households.

That's because the IRS disproportionately targets low-income Americans when it conducts tax audits each year. In fact, households with less than $25,000 in earnings are five times as likely to be audited by the agency than everyone else, according to a recent analysis of tax data from fiscal year 2021 by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University.

The reason for that is a rise in what is known as "correspondence audits," meaning the IRS conducts reviews of tax returns via letters or phone calls rather than more complex face-to-face audits. Just a fraction — 100,000 of the 659,000 audits in 2021 — were conducted in person.

According to the Syracuse study, more than half of the correspondence audits initiated by the IRS last year — 54% — involved low-income workers with gross receipts of less than $25,000 who claimed the earned income tax credit, an anti-poverty measure.

The discrepancy is primarily due to high-income taxpayers having complex investments that can easily shroud the gaps between taxes owed and paid vs. taxes reported and paid.

The IRS has maintained that it will not increase audits on households earning less than $400,000 if the $80 billion in funding is approved.

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The Internal Revenue Service headquarters in Washington, D.C., on Feb. 25, 2022. (Al Drago/Bloomberg via Getty Images / Getty Images)

"These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans," IRS Commissioner Chuck Rettig wrote in a letter to lawmakers earlier this month. "As we have been planning, our investment of these enforcement resources is designed around Treasury’s directive that audit rates will not rise relative to recent years for households making under $400,000."

In a memo addressed to Rettig, Yellen said the influx of funding over the next decade is a "significant operational challenge" that ultimately allows for a "monumental opportunity" to reshape the tax-collecting agency.

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