Biden’s tax threshold adds marriage penalty; couples at higher risk for federal audits

President Biden introduced a “potential marriage penalty” into the tax system when he ordered the IRS to conduct more audits of higher-income Americans, the agency’s inspector general said.

In persuading Congress to allocate tens of billions of dollars for the tax agency to conduct audits, Mr. Biden promised that agents would focus on those with annual incomes of $400,000 or more.

The way the Treasury Department wrote the guidance, however, treats all “households” the same way. That means a family with two spouses making $220,000 each faces a higher chance of an audit than a single man who earns $390,000.

The IRS is working through the marriage penalty and a host of other issues as it plans to carry out Mr. Biden’s audit orders and spend the tens of billions of dollars that Congress allocated for the effort, said the Treasury Inspector General for Tax Administration.

TIGTA said time is running short on making those decisions.

“The IRS believes it has more time to work with the Treasury Department to finalize the audit coverage rate. However, given the complexity of developing the methodology and that FY 2025 is only a few months away, we believe the IRS needs to expedite finalizing its plan to comply with the Treasury Secretary’s Directive,” the inspector general said.

Mr. Biden promised that those with annual incomes less than $400,000 would not have higher chances of being audited, but those earning more than $400,000 would.

What that means isn’t simple.

The IRS is trying to figure out how to measure who falls into which category.

The agency is wary of using taxpayers’ reported total positive income, or TPI. It figures that some people right at the line will play shenanigans to fall below the threshold.

“IRS officials stated that they are not following their standard approach to calculate audit coverage because they want to have the flexibility to audit taxpayers who might be incentivized to take advantage of higher audit rates of taxpayers with TPI at or above $400,000 by reporting incomes below that amount,” the inspector general said.

Another question is the historical baseline for comparing audit rates.

On that measure, the IRS has taken a decidedly pro-taxpayer approach and picked as the baseline the tax year 2018, when audits were “abnormally low,” the inspector general said. Just one-third of 1% of those reporting income less than $400,000 were audited, or nearly 40% fewer than the previous tax year.

The inspector general attributed that to years of budget cuts and the pandemic, which hindered operations in 2020 and beyond for the 2018 audits.

Then there is the marriage issue.

The inspector general said combining a married couple’s annual income can push the household above $400,000, even though the individual earnings may be below that level.

“The potential marriage penalty exists because the threshold for married couple households is not double the amount allowed for single filer households, i.e., for married couples filing jointly, the TPI threshold does not increase to $800,000, thus increasing their chances of an examination,” the audit found.

IRS officials told the inspector general they were bound by the Treasury Department’s 2022 guidelines, which did not distinguish between married joint filers and single-filer households.

The agency said the $400,000 threshold without marriage distinctions will make it easier to track its progress.

The IRS said it hasn’t made any final decisions.

Grover Norquist, president of Americans for Tax Reform, said Mr. Biden could settle the issue quickly if he wanted.

“The president can make a phone call tomorrow and change this,” he said. “They work for [Treasury Secretary Janet] Yellen. Yellen works for the president.”

Mr. Norquist, who has battled Democratic presidents over tax changes for decades, said the administration is intentionally vague about its goals.

He said Mr. Biden would need to target small-business owners to realize the revenue he expects from more aggressive audits, and his fuzziness about the targets allows him to do this while minimizing the political price.

“Taxes don’t go away, and they do trickle down to hit everybody because that’s where the money is,” he said.

The Inflation Reduction Act, a budget-climate law that Democrats powered through Congress in 2022, supercharged the IRS with $80 billion in more funding to be spent over a decade.

Republicans have forced some of that money to be recaptured, leaving about $57 billion available for modernization, better taxpayer services and more audits.

The Treasury Department didn’t respond to inquiries for this report.

IRS officials didn’t address the marriage issue directly but said in response to questions from The Washington Times that they have made significant strides in following Mr. Biden’s directives to use the 2022 funding to target high-income returns.

The IRS has already collected $1 billion from millionaires with overdue tax bills and is considering further action against tax avoiders, large corporations and complex partnerships.

“At the same time, the IRS is taking steps to refine audit tools to avoid burdening those taxpayers who play by the rules and add more fairness to address audit disparities among lower-income taxpayers, including Earned Income Tax Credit recipients. As the IRS continues to work to formalize its methodology for audit rate reporting, our focus on high-end enforcement will continue,” the agency said in a statement.

During the ’10s, those audit rates declined significantly.

Four out of every 1,000 returns of those making less than $25,000 in 2018 were audited. The audit rate of those making $25,000 to $500,000 was 1 or 2 out of every 1,000 returns.

In 2010, the audit rate for those making less than $25,000 was 10 in 1,000. The rate was 23 per 1,000 returns of those making $200,000 to $500,000.

Those making $10 million or more in 2010 were audited at a rate of 212 per 1,000 returns. In 2018, they were audited at a rate of 39 per 1,000 returns — a drop of 81%.