Yellen outlines planned changes to the IRS in $80B overhaul

Treasury Secretary Janet Yellen on Thursday detailed some of the Biden administration's plans for the Internal Revenue Service as part of the $80 billion funding boost, including expanding in-person services.

Speaking at an IRS facility in New Carrollton, Maryland, Yellen said the funding will help to improve the IRS in the form of better technology and taxpayer services, and stronger enforcement focused on wealthy Americans and corporations.

"The Inflation Reduction Act finally provides the funding to transform the IRS into a 21st century agency," Yellen said.  "While all the improvements won’t be done overnight, taxpayers can expect to feel real differences during the next filing season."

The funding was included in the Democrats' health care and climate change spending bill – dubbed the Inflation Reduction Act – that Biden signed into law last month. 

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Yellen said the money will go toward increasing services at IRS Tax Assistance Centers and projected that these centers will have the capability to help about 2.7 million Americans in the upcoming filing season, compared to about 900,000 now.

In addition, she said the IRS will hire about 5,000 customer service representatives in order to improve the IRS' answering service. (Currently, the IRS has only been able to answer about 2 out of 10 phone calls). 

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 $739 billion bill. But it has elicited a fierce pushback from Republicans, who say that a beefed-up IRS could ultimately hurt lower-income Americans. 

That's because the IRS disproportionately targets low-income Americans when it conducts tax audits each year. In fact, households earning less than $25,000 a year 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.

Yellen has pushed back against that fear, reiterating on Thursday that she directed the IRS to not increase audits on households earning less than $400,000 annually.

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"Importantly, I’ve directed that enforcement resources will not be used to raise audit rates for households making under $400,000 a year relative to historical levels," she said. "In fact, we expect audit rates for honest taxpayers to decline, once the IRS has the right technological infrastructure in place. This means a simpler tax filing season for taxpayers who are doing everything right."

Revenue raised by the policies will go toward initiatives designed to combat climate change and curb pharmaceutical prices, as well as efforts to reduce the nation's $30 trillion debt. It includes about $433 billion in new spending, while roughly $300 billion of the new revenue raised would go toward paying down the nation's deficit.