Yellen tells IRS not to use new funding to increase middle-class audits

Treasury Secretary Janet Yellen directed IRS officials not to use new funding secured for the agency in Democrats’ Inflation Reduction Act to increase audits on households making under $400,000 annually.

In a Wednesday letter to IRS Commissioner Charles Rettig, Yellen reaffirmed a commitment “that audit rates will not rise relative to recent years for households making under $400,000 annually,” which she described as a “guiding precept of the planning” for the agency.

“Specifically, I direct that any additional resources — including any new personnel or auditors that are hired — shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels,” she wrote. 

“This means that, contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited,” she said.

Yellen’s comments are an apparent response to Republican attacks targeting Democrats’ proposed funding for the agency, which has seen its funding and staffing decline for roughly a decade.

Democrats say the proposed funding is aimed at going after wealthy tax cheats. But members of the GOP, including Sens. Ted Cruz (Texas) and Lindsey Graham (S.C.), have warned of tens of thousands more IRS agents and an increase in audits that would impact those below the $400,000 threshold.

“Crucially, these resources will support a much-needed upgrade of technology that is decades out-of-date, and an investment in taxpayer service so that the IRS is finally able to communicate with taxpayers in an efficient, timely manner,” Yellen said.

Democrats have set their sights this week on approving roughly $80 billion in funding to strengthen the office and bolster its enforcement of tax laws. 

The IRS funding proposal is one of several tax-related provisions included in the Inflation Reduction Act to raise revenue to help cut the nation’s deficit over the next decade, while also offsetting investments in health care and climate. 

In her letter to Rettig, Yellen said the IRS’s “enforcement resources will focus on high-end noncompliance.”

“This is challenging work that requires a team of sophisticated revenue agents in place to spend thousands of hours poring over complicated returns, and it is also work that has huge revenue potential: indeed, an additional hour auditing someone making more than $5 million annually generates an estimated $4,500 of additional taxes collected,” Yellen said. 

“For regular taxpayers, as you emphasized last week, the result of this resource infusion will be a lower likelihood of audit by an agency that has the data and technological infrastructure in place to target enforcement resources where they belong—on the high end of the income distribution, where the top 1% alone is estimated to not be paying $160 billion in owed taxes each year,” she added. “That’s important as a matter of revenue-raising, but it’s also essential as a matter of fairness.”