The Internal Revenue Service (IRS) raked in a record $4.9 trillion in taxes from Americans in the last fiscal year, due in large part to automated collections processes and aggressive audits that saw taxpayers hit with billions in additional taxes after examination.
The Treasury Inspector General for Tax Administration (TIGTA), the watchdog that oversees the IRS, revealed in a Dec. 20 report on tax compliance activities that the agency collected a record-breaking amount of money in fiscal year 2022 from American taxpayers.
The $4.9 trillion the tax agency raked in last year was around $790 billion more than the prior year, thanks in large measure to a significant increase in enforcement revenue.
The IRS collected $72 billion in revenue from its enforcement activities in FY 2022, not far below the record-setting $75 billion in FY 2021 but well above the historical average of around $59 billion (from 2013-2020).
All those dollars rolling in from enforcement activities are likely to rise going forward, given that the IRS announced over the summer that, thanks to a new funding boost, it was launching a “sweeping, historic” tax enforcement initiative using artificial intelligence (AI) and other cutting edge technologies to crack down more effectively on non-compliant taxpayers.
But while AI and other advanced computer algorithms have yet to be deployed at the IRS on a large scale as the agency continues to modernize its systems, automation has already bolstered the agency’s ability to stuff the government’s coffers—even as the overall number of examinations declined, as did the number of enforcement agents.
“The revenue collection was driven substantially by automated collection processes,” the TIGTA report states. Roughly 74 percent of the IRS’ enforcement revenue was collected within the agency’s Collection notice stream and the Automated Collection System (ACS).
While the IRS is poised to continue increasing its reliance on automated systems to squeeze more tax dollars from taxpayers, it’s also looking to hire another 3,700 tax enforcers as it spends an extra $46 billion of the recent $80 billion (later reduced to $60 billion via debt ceiling negotiations) funding boost on enforcement.
Another important factor why the IRS managed to take in a record amount of tax revenue last year was hitting taxpayers with aggressive additional tax assessments after examinations.
Even More Taxes
The watchdog report shows that, after audits, the IRS levied an additional $30.2 billion in taxes on Americans last year, roughly 13 percent more than in 2021 and a whopping 75 percent more than in 2019.
When the IRS completes an examination, it can either leave the tax assessment “as is” or it can propose an adjustment (up or down) that increases or reduces the amount of tax owed.
“The general trend of proposed additional tax from FY 2019 to FY 2022 is over a 75 percent increase in the total proposed additional tax resulting from examinations, and the most significant increase (136 percent) was from correspondence examinations,” the watchdog said.
Over the past four years, the IRS’ examinations function proposed nearly $90 billion in additional taxes on U.S. taxpayers.
The watchdog said that the record tax collections were driven by individual income taxes, which increased by 47 percent since 2019, an increase of roughly $1 trillion.
More Audits of Those Earning Under $400,000?
The question of whether the IRS will use some of the $60 billion or so funding boost to increase tax enforcement of people making less than $400,000 has been a contentious issue.
IRS and Treasury Department officials have pledged not to increase audit rates for this group of Americans, while Republicans and others have argued that this pledge is either false or wishful thinking.
Treasury Secretary Janet Yellen has directed the IRS not to raise audit rates above historical levels for this group of taxpayers, while IRS Commissioner Danny Werfel has repeatedly made the same pledge.
But the IRS watchdog recently cast doubt on this promise, warning that Americans making less than $400,000 could inadvertently get caught in an enforcement dragnet because the IRS doesn’t clearly define “high-income” and its enforcers use an outdated $200,000 high-income threshold as their default.
During recent testimony on Capitol Hill, Mr. Werfel appeared to acknowledge the possibility that audit rates could rise for Americans making less than $400,000 per year.
During an Oct. 24 hearing, Rep. Virginia Foxx (R-N.C.) pressed the IRS chief to explicitly guarantee that the IRS wouldn’t raise audits on Americans making less than $400,000.
“You are guaranteeing that you will not increase the number of audits of people making less than $400,000 a year?” Ms. Foxx asked.
“That is my marching order to the IRS,” Mr. Werfel replied before adding that “if we fall short of that, I will be held accountable for it,” hinting that, even with the best of intentions, there’s a chance that the IRS might fail to make good on this promise, much like the watchdog has warned.
“But we will publish those rates,” Mr. Werfel added, referring to tax audit rates for Americans earning less than $400,000, suggesting that time will tell how closely the agency’s growing army of tax enforcers will follow his orders.
“A little while ago, you said you had control of the IRS,” Ms. Foxx said. “So we’ll come back to you with that,” she added, suggesting that Republicans intend to hold Mr. Werfel’s feet to the fire if the $400,000 tax audit pledge is broken.