IRS Targeting More Supposedly 'High-Income' Americans Than Advertised

Don’t count on that promise to not hike taxes on “people making less than $400,000.”

Earlier this month, the IRS announced a new focus on squeezing "high-income earners" as part of a "historic effort to restore fairness in tax compliance." I'm not inclined to put the word "fairness" or any other positive sentiments in proximity to "tax compliance," however the announcement aligns with a Biden administration vow to target those making more than $400,000 per year. But according to the tax inspector general, the IRS's cutoff for "high-income" is half that of the White House's, meaning the tax man's scrutiny is likely to sweep farther and wider than we've been told.

Should Only 'High-Income Earners' Be Afraid?

"Capitalizing on Inflation Reduction Act funding and following a top-to-bottom review of enforcement efforts, the Internal Revenue Service announced today the start of a sweeping, historic effort to restore fairness in tax compliance by shifting more attention onto high-income earners, partnerships, large corporations and promoters abusing the nation's tax laws," according to a September 8 IRS press release.

The move was expected given that the White House promised in March "to improve tax compliance by finally cracking down on high-income individuals." In February, President Joe Biden himself insisted "that people making less than $400,000 a year will not see a single penny increase in taxes."

As you may remember, last year the tax agency was gifted an $80 billion budget infusion to ensure that it would have enough enforcers to paw through seat cushions and tighten thumbscrews in anticipation of this new emphasis on satisfying the government's insatiable appetite. However, there's good reason to believe the IRS's "high-income" attention will fall on more Americans than promised.

The Definition of 'High-Income' Is a Little Slippery

"The IRS does not have a unified or updated definition for individual high-income taxpayers," the Treasury Inspector General for Tax Administration (TIGTA) warned in a report on August 31. "The IRS's current default definition of high-income taxpayers is $200,000 and above."

"The Tax Reform Act of 1976 required annual publication of data on individual income tax returns reporting income of $200,000 or more," TIGTA notes, and was formally set as the benchmark for "high-income taxpayers" in 2005. It hasn't budged since, leaving everybody earning between $200,000 and $1,000,000 in the same IRS income category.

"The current examination coding scheme uses $200,000 as a main threshold even though it is no longer a reasonable standard for high earners given inflation since 2005," TIGTA adds. "For example, there is no way to identify the complete population of taxpayers that meet the criterion of $400,000 or more specified by the current Treasury Secretary."

The report recommends the definition of "high-income" be revised so that the term means the same thing to IRS agents as it does in press releases from the Department of the Treasury and the White House. "At a minimum, the IRS should accept the Treasury Secretary's $400,000 directive as the new high-income floor on which IRS leadership can focus enforcement efforts."

Would it surprise you to hear that the IRS refused?

The IRS Really Likes Slippery Definitions

"We do not agree," responded Douglas W. O'Donnell, IRS deputy commissioner for services and enforcement, in an August 14, 2023, memo attached to the report. "In accordance with the Treasury Secretary's directive, the IRS will focus on high-income high-wealth individuals, large corporations and complex partnerships that present a high risk of noncompliance while at the same time not increasing audit rates above historic levels for households making less than $400,000 and small businesses.…However, a static and overly proscriptive definition of high-income taxpayers for purposes of focusing on income levels above which taxpayers have unique and varied opportunities for tax would serve to deprive the IRS of the agility to address emerging issues and trends."

That's a lot of words to say that tax collectors want to continue using the phrase "high-income" in as slippery a way as they please without being pinned to any specific definition. Who is a "high-income earner"? Maybe somebody earning over $400,000, or maybe you if it's your lucky day.

You might notice, also, that the IRS promises only to not increase "audit rates above historic levels" for households earning less than $400,000. That's the same commitment found in Treasury Secretary Janet Yellen's August 10, 2022, directive to the IRS, and in the IRS's September 8 press release. A promise to maintain the recent rate of audits on those making less than the income cutoff is not the same as "people making less than $400,000 a year will not see a single penny increase in taxes." It's just an assurance that one particular tool for tax extraction won't be relied upon by the thousands of new agents the IRS plans to hire.

Maybe You Should Be Afraid After All

There aren't enough wealthy people to justify all of that attention. It's the millions of middle-class Americans who are juicy targets for a "historic effort to restore fairness in tax compliance."

"The main targets will by necessity be the middle- and upper-middle class because that's where the money is," The Wall Street Journal editorial board cautioned last year when the massive boost in IRS funding was being debated by lawmakers. "The Joint Committee on Taxation, Congress's official tax scorekeeper, says that from 78% to 90% of the money raised from under-reported income would likely come from those making less than $200,000 a year. Only 4% to 9% would come from those making more than $500,000."

High-income earners also have the money to defend themselves with accountants, attorneys, and creative financial arrangements. People with less money are easier targets for tax collectors who want a low-friction payoff for their efforts.

"Syracuse University's Transactional Records Access Clearinghouse (TRAC) released data provided to it by the Internal Revenue Service (IRS) on audits performed by the agency in fiscal year 2022," Reason's Liz Wolfe reported in January. "Despite the infusion of new funding earmarked for the IRS via last year's Inflation Reduction Act, the agency continued historic trends of hassling primarily low-income taxpayers, with relatively few millionaires and billionaires getting caught up in the audit sweep."

That's the reality of what the IRS does, as opposed to the vague and not-so-binding assurances officials make to the public about what they intend to do.

When it comes to taxes, promises are cheap. But the government's spending habits are extremely expensive, and that's what drives its appetite for revenue.