MW What Trump's plan to end IRS 'overstepping' could mean for audits of rich people - and call hold times for everyone else
Andrew Keshner
The incoming Trump team wants to change the IRS mentality from 'we're the tax police,' one expert says
The Biden administration tried turbocharging the Internal Revenue Service's tax-collection capabilities with billions in extra funding and bold audit targets aimed at rich taxpayers.
Those enforcement efforts face a new challenge due to Capitol Hill maneuvers on funding - and it may be a preview of a scaled-back role for tax auditors as Donald Trump returns to the White House and Republicans take Congress next year.
Trump's team is already telling MarketWatch that he'll end "bureaucratic overstepping" at the IRS.
Rewind to 2022, when Democrats passed the Inflation Reduction Act, giving the IRS $80 billion in funding over a decade. More than half the money was for increased enforcement, focused on businesses and wealthy households making at least $400,000. The rest of the funding was devoted to better customer service and technology improvements.
The funding infusion was needed to rebuild a beleaguered IRS and narrow a gap on unpaid taxes, where rich tax cheats were big contributors, Democrats said. Republicans, wary of the potential for waste and overreach, have had the enforcement money in their sights ever since.
Now there's $20 billion in IRS funding that's potentially bound for a freeze due to wording on laws that have temporarily averted a government shutdown, according to Democratic lawmakers and Treasury officials. That's after a 2023 debt-ceiling deal between congressional Republicans and Biden's White House already steered roughly $20 billion away from the agency.
Without the $20 billion that's in limbo now, there could be 8,000 fewer audits of rich people and corporations from 2025 to 2029, according to IRS estimates out last week. And starting in 2026, IRS workers would be able to answer far fewer customer-service phone calls, and taxpayers with questions would have to wait longer, the estimates said.
Unless laws soon assure the $20 billion in funding, Wally Adeyemo, the deputy Treasury secretary, said "you could see a dramatic fall-off in our ability to do the two things that I think matter most, which is raise revenue, especially from those people who are not paying on a regular basis - wealthy individuals and corporations - but also a dramatic fall-off in customer service."
Dialed-down audit ambitions are likely coming anyway, according to Republican observers talking about the future of the IRS.
"I expect the IRS budget to be reduced," said Dave Kautter, a former acting IRS commissioner and Treasury Department official in the first Trump administration.
Republican lawmakers will be willing to pay for better technology and customer support, he said. But money for enforcement and anything to cover the overhead of a larger IRS "will be substantially cut back."
The incoming Trump team "wants to change the default mentality from 'we're the tax police,' which is where it is today, to a customer-services agency, and we're here to help people do their taxes," said Ryan Ellis, president of the Center for a Free Economy, a conservative nonprofit organization.
With IRS enforcement now, "the assumption is you're guilty until proven innocent," and that needs to change, he said. Ellis is also a tax professional with some business-owning clients in the six-figure range. "They are not looking to cheat, they are looking to stay out of trouble."
"President Trump will deliver on his promise to stop the bureaucratic overstepping that occurs in many areas of the federal government, including the IRS," said Taylor Rogers, spokeswoman for the Trump-Vance transition team. "President Trump will cut taxes, increase transparency, and make government efficient again."
The IRS did not respond to a request for comment.
What the IRS has done lately
Since the Inflation Reduction Act's passage, the IRS has emphasized the early results it's achieved with the new funding. The agency collected over $1 billion from rich tax delinquents, told wealthy non-filers they need to submit tax returns, and launched nearly 80 new audits against large hedge funds, law firms and other massive partnerships. It's also staffed up phone lines, while expanding online and in-person customer services.
Through mid-April, the IRS had nearly 9,100 revenue agents and is aiming to have over 12,600 agents in its ranks, the agency said. Earlier this year, IRS Commissioner Danny Werfel said the goal for the end of the decade was an agency staffed overall at 102,500 people. That's still below headcounts during the late 1980s and early 1990s, Werfel has noted.
Despite that early flurry, there's still a lot of the Inflation Reduction Act money on the table.
So far, the IRS has spent nearly $7 billion, or 12%, of the remaining funds, according to the Treasury inspector general for tax administration. The data shows most of the remaining $24 billion for enforcement still hasn't been used, which is why the Treasury Department is concerned about the potential to lose another $20 billion.
It's a potential blow for the federal government's financial health too, said Adeyemo. There was a nearly $700 billion gap between taxes owed and taxes actually paid during 2022, according to IRS projections. Compliance efforts raked back $90 billion, the estimates said.
The $36 trillion national debt and yearly deficits are in focus for bond-market investors, as Trump takes office and also eyes another round of tax cuts as his 2017 tax law expires.
Read also: Trump could save $1.4 trillion nixing Biden executive orders
Despite some of the public tough talk against the taxman, Adeyemo said there is GOP support for a stronger IRS. He told reporters last week he's talked with some Republicans in recent weeks and they've all "very supportive" of customer-service improvements.
"Fundamentally, I think none of them have said they don't want people to pay the taxes they owe," Adeyemo said. "I think the question really becomes, how do you fund that going forward? They are going to have to make decisions."
The IRS generally has three years to audit a tax return. In its most recent finalized audit rates, the IRS said it examined 11% of 2019 returns with total positive income above $10 million, up from 9.9% in 2018. Year over year, audit rates for returns under $500,000 were largely unchanged, ranging at 0.2% to 0.4%.
A 'mad rush' to close audits?
The Trump administration is going to have to decide how it put its stamp on the IRS and that may take time, said Ellis.
Trump tapped Scott Bessent as his Treasury Secretary pick, and the IRS would fall under Bessent's portfolio.
The role of IRS commissioner is a presidential appointment and Werfel's term runs through November 2027. The commissioner and IRS chief counsel are the agency's only appointed roles, with other roles counting as civil servants, according to the IRS.
Treasury Secretary Janet Yellen told the IRS in August 2022 to use the Inflation Reduction Act money only to boost audits on taxpayers who have more than $400,000 in income. If Bessent is confirmed, there's nothing stopping him from ripping up Yellen's instructions to signal a new direction, according to experts.
That would be a problem, said Lily Batchelder, formerly assistant secretary of tax policy in the Treasury Department for most of Biden's presidency.
"If you don't have that directive or guidance in place, you're signaling to the IRS that it is fine to focus more on the middle class, where audits are easier to do," she said. That's compared to something like the sophisticated scrutiny needed for a tax return from a millionaire with income from a complex partnership, she said.
"I'm really concerned a Trump administration and Congress are going to repeal the long-term funding for the IRS, which has been absolutely transformative," said Batchelder.
"Each Treasury secretary can set their own directives," said former IRS commissioner Charles Rettig, whose tenure at the agency stretched from Trump's first presidency into Biden's term.
Rettig was the person receiving Yellen's 2022 letter, and he pushed for many IRS upgrades. He told lawmakers in 2021 that the agency was getting "outgunned" by wealthy taxpayers.
Looking ahead, Rettig told MarketWatch that a "resilient" IRS staff will adjust according to wherever funding levels are set. That could mean relying more on technology if staffing levels are constricted, he said.
Problems can arise when politicians weigh in on audit approaches, said Kautter. After Democrats criticized falling audit rates, Trump's first Treasury secretary, Steven Mnuchin, told the IRS in early 2020 to start auditing at least 8% of high-net worth returns worth at least $10 million.
IRS officials eventually stopped following the instructions because too many of those audits resulted in no change to the taxpayer's bill, according to the Treasury's inspector general for tax administration. IRS officials said they were focusing on Yellen's 2022 directive instead.
Beyond the IRS, accountants and tax lawyers have been seeing the effects of the agency's growing muscle.
Robert Kovacev, a member of Miller & Chevalier who represents businesses and high-net worth individuals in tax disputes, has seen it up close. He doesn't expect "a mad rush to close a bunch of audits that have been opened."
Eventually, though, "you'll see a difference in the level of audit activity."
-Andrew Keshner
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December 02, 2024 16:00 ET (21:00 GMT)
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