Supersizing the IRS Will Hurt the Working Rich, Not Fat-Cat Tax Evaders

After months of acrimonious infighting, Sen. Joe Manchin (D–W.Va.) and Senate Majority Leader Chuck Schumer (D–N.Y.) have reached a deal on a spending bill, portrayed as a means of fighting inflation, that will devote federal money to climate change initiatives, clean energy, and reducing the deficit. The spending bill, called the Inflation Reduction Act of 2022, will pay for its ambitious proposals in part by doubling the size of the IRS, empowering the agency to reach its grubby little hands into ever more people's pocketbooks.

"The Manchin-Schumer deal includes roughly $370 billion in energy and climate spending, $300 billion in deficit reduction, three years of subsidies for Affordable Care Act premiums, prescription drug reform and significant tax changes," reports Politico.

"This is the action the American people have been waiting for," President Joe Biden announced.

But the bill also beefs up IRS enforcement capabilities, allowing our tax cops to audit far more people than before—including many working-professional high earners, while the richest continue to employ teams of accountants to take advantage of every possible loophole (as they darn well should). Is this really what Biden thinks the American people have been waiting for?

The Democrats are about to DOUBLE the size of the IRS. Think again if you think they're going to extract more revenue from the rich folks and corporations who already hire the smartest and costliest accountants. pic.twitter.com/W8waZylxBM

— Kyle Smith (@rkylesmith) July 28, 2022

Enrolled agent here. Someone who has seen a client's field audit or two.

The IRS doesn't go after the super rich with these audits. They go after the $500,000 - $1,000,000 self employed guy.

The audits are pure "gotcha" fishing expeditions against honest taxpayers.

— Ryan Ellis (@RyanLEllis) July 28, 2022

"Our major concern is that the IRS provisions of the bill contain no accountability provisions for the agency, no sort of significant oversight of its efforts to reform and improve its processes, not a ton of robust protections for taxpayers who have seen their privacy or the security of their information threatened," Andrew Lautz, director of federal policy at the nonpartisan National Taxpayers Union, tells Reason.

The agency has been repeatedly criticized for failing to keep taxpayer information secure. In 2021, ProPublica obtained and published the private information of hundreds of the highest net worth taxpayers; it's still unclear how the investigative journalism outlet got access to this sensitive information. In 2015, hackers stole the personal information of 104,000 taxpayers—a number later amended to 700,000 upon more thorough investigation. And just this year, the IRS oddly destroyed 30 million paper tax returns without processing them, due to a hefty pandemic-era backlog, to make room for returns from the 2021 tax filing season.

As for the Manchin-Schumer bill, the IRS enforcement section leaves a lot to be worried about while doing very little to fix the agency's persistent customer service and data security failures.

"There is a provision in the bill that says 'nothing in this subsection is intended to increase taxes on any taxpayer with a taxable income below $400,000′" says Lautz, adding that this clause is "hardly an ironclad guarantee" that this increase in funding won't mean an increase in audits for precisely that group.

"This provision, to me, seems like a fig leaf," says Lautz. "I think [the danger] with any enhanced IRS efforts, if they don't come with strict oversight and strict requirements from Congress, is that they fall hardest on low- and middle-income taxpayers."

"There are wealthy taxpayers who are responsible for some of this estimated tax gap…who are not paying the taxes that they owe according to the law. But those wealthy taxpayers have the most resources and the best resources at their disposal to fight the IRS," says Lautz. "History has shown us that the IRS will go after the low-hanging fruit."

History also shows us that Democrats, time and time again, will try to pay for their ambitious spending proposals via rooting around in the existing taxpayer pool to try to find scofflaws and accidental noncompliants, often with little success.

"Another new Democratic administration, another hollow promise to discover hundreds of billions of unreported tax obligations under the national mattress," wrote Reason's Matt Welch last year. "A staggering $700 billion in currently undetected taxpayer IOUs is grabbable over the next decade, and $1.6 trillion the decade after, if only we give the IRS an extra $80 billion worth of rope with which to close the 'tax gap.'"

But the Biden administration's claims might seem familiar, noted Welch, because the Obama administration had claimed it was going to crack down on overseas tax evasion, scrounging up $210 billion.

This, for the most part, did not happen, but President Barack Obama's efforts did end up creating the Foreign Account Tax Compliance Act (FATCA), a set of onerous reporting requirements for Americans that keep more than five figures' worth in overseas accounts (and the financial institutions that serve them). "The results were predictable," noted Welch. "Expats were locked out of banking services, record numbers of mostly middle-class Americans renounced their U.S. citizenship, and IRS collections went essentially unchanged."

"Conservatives are obsessed with making it as easy as possible for rich people to cheat on their taxes. It's genuinely sick," tweeted Slow Boring author and pundit Matthew Yglesias earlier today.

But that's not why most fiscal conservatives and libertarians are concerned. They're concerned because beefed-up IRS enforcement is frequently billed as a means of cracking down on fat-cat tax evaders and shoring up federal government coffers, when in reality it allows a privacy-infringing government agency to harass the working rich, finding very little additional revenue in the process. There's no reason to think this time will be different.