‘Your Basis In Disagreeing Would Be…?’: Chuck Edwards & IRS Chief Go Back & Forth About Audit Rates

4 months ago

During a House Appropriations Committee hearing on Tuesday, Rep. Chuck Edwards (R-NC) questioned Internal Revenue Service Commissioner Danny Werfel about auditing rates.

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Transcript

00:00Thank you very much, Mr. Carl. Now I recognize Mr. Edwards for any questions he may have.

00:06Thank you, Mr. Chair. Mr. Werfel, thank you. We probably look as much forward to this as

00:14you do. Of the initial $80 billion pay raise to the IRS, your agency allocated $45.6 billion

00:25towards enforcement, and you claim that taxpayers under $400,000 would not experience the effects

00:32of that increased enforcement. Nonetheless, according to the IRS data book for 2023,

00:42it was reported that the IRS proceeded with 495,700-some-odd examinations of individuals

00:54making less than $500,000. And I'd love to get more granular and share the exact amount

01:03for the $400,000 mark and less, but the data book doesn't include that level of specific

01:13data. It's using $500,000 as the maximum in the range that I'm referring to. And that's

01:23compared to just 21,455 examinations of taxpayers making more than $500,000, resulting in just

01:31over $3.6 billion in additional tax. Clearly, American families and individuals earning

01:40$400,000 or less are experiencing the brunt of IRS enforcement actions. Would you agree

01:49with that? I would not, Congressman. And your basis in disagreeing would be? Because

01:56what I've said and what I'm committed to is that taxpayers who earn less than $400,000,

02:02there's no change in their likelihood of being audited the day before the Inflation Reduction

02:07Act was passed versus the day after. However, if you're high income, if you earn more than

02:13$400,000, and the reality is we're really laser focused on much higher levels of income,

02:19for those individuals, the audit rate will increase. And I've announced in my testimony

02:24today, the various cohorts, millionaires, billionaires, large corporations, complex

02:29partnerships, we intend to significantly ramp the audit rates between now and 2026. But

02:35if you earn less than $400,000, we peg your audit rate back to 2018, which was a historic

02:41low .3%. Year over year, my goal and my intention is that those taxpayers will not see an increase

02:50in that 2018 rate. So maybe you can help me understand the difference

02:55in the chart that I've got here that was taken straight from the data book that I referenced

03:06a while ago. And I pulled this data directly from your agency's own book. The Inflation

03:13Reduction Act seems to have a concentration of audits against the lower and middle class

03:21American people. In fact, it looks like it's not about 95.5% of the audits have been conducted

03:28on folks making less than $500,000. Can you tell us what is the difference between your

03:38claim that folks making less than $400,000 are not being targeted and my calculation

03:45of the table that I've referenced? I can explain this. What your table is reflecting

03:52is audits that were closed, that were started 2017, 2018, 2019. It takes sometimes months,

04:00but often years for an audit to close. And so what you have, for example, is for large

04:07corporations, the audit rate, and that's for $250 million or more in assets, the audit

04:13rate was 8.8% in 2019, and we plan to get it to 22.6%. That won't be reflected in our

04:21data book for a few years. So the bars that you are demonstrating are reflecting a pre-Inflation

04:28Reduction Act set of audit activity that is kind of closing up now. What has been started

04:34since the Inflation Reduction Act and what will play out in future data books is the

04:39bar chart will shift dramatically to the right as we ramp up, as I mentioned, from 8.8% to

04:4622.6% for our largest corporations and from 11% to 16.5% on wealthy individuals and on and on.

04:56And so are you claiming that the audits prior to 2018 were targeting 95.5% of the

05:09returns for folks less than $500,000, but we expect to see that lower after the inflation?

05:15Well, I think also your data is raw data versus percent audited, so that would be another

05:23clarification to make. What I'm suggesting, and I'm happy to brief you separately and

05:28get in the details, and by the way, the data book in the future will be listed at $400,000

05:32rather than $500,000 to help with the transparency. What I'm suggesting is that on a probability,

05:40you're a small business, you're a middle or low-income individual, your probability

05:45of audit has not changed. It will be the same probability that it was in 2018, and it will

05:51be that way for years, and by the way, 2018 is a historically low audit rate. So there

05:57should be some degree of comfort in the fact that I am publicly committing to, and there

06:03will be transparency in future data books, that we are not intending to, and I've ordered

06:08the team not to raise that audit rate above that 2018 level. The opposite is true for

06:14our higher wealth filers, whereas I've stated publicly the intention, the marching order

06:21is to raise those audit rates. Now, this will all be tested in public data that will be

06:25available in the future. The issue is that it takes time for these audits to unfold.

06:30An audit of a large complex corporation can take a long time before it's closed out. We

06:35will announce, consistent with what we can do under the law, when we send new waves of

06:40audits. For example, we announced recently that we sent audit letters to 76 of the largest

06:45partnerships in the world, but in terms of when those close out, that will take some

06:50years before they close out.

06:51And so I think I hear you saying, don't trust the data that's reported now. It's different.

07:00You can trust it, it's just calibrated back to the sweet spot of when these audits were

07:05issued is pre-inflation reduction act. Trustworthy data. I'm saying the timing to assess whether

07:13we met the commitment not to increase audit rates on people over 400,000 is happening

07:18in real time. It's actually, as I said in my testimony, tax year 23, which we just completed,

07:24is the first full tax year post-inflation reduction act. The audits of tax year 23 taxpayers

07:30those people, that's kind of more in the future than in the past in terms of the schedule

07:37for those audits.

07:38I've gone well beyond my time, Mr. Chair. I apologize, but I would appreciate the opportunity

07:43to engage with your office further to get a better understanding because the data that's

07:48available to us now says something materially different than what we're hearing would be

07:56the implications for folks making less than 400,000.

07:58I will be responsive to Congressman Carl and I will be responsive to you and get you what

08:02you need.

‘Your Basis In Disagreeing Would Be…?’: Chuck Edwards & IRS Chief Go Back & Forth About Audit Rates

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