The Internal Revenue Service (IRS) has announced a significant shift in its auditing strategy, promising “swift and aggressive action” to ensure proper tax payment compliance, particularly focusing on high-income individuals and large corporations. This change comes in the wake of new funding provided by the Inflation Reduction Act (IRA), which aims to enhance the IRS’s ability to enforce tax laws more effectively.
New Funding, New Focus
For years, the IRS has struggled with budget cuts that severely hampered its ability to audit wealthy individuals and big businesses effectively. These financial constraints have led to a dramatic drop in audit rates; for millionaires, audits decreased by over 70% from 2010 to 2019, and for large corporations, by more than 50%. However, with the recent financial boost from the IRA, the IRS is now poised to close the staggering $683 billion tax gap caused by underreported income, underpayment of taxes, or failure to file tax returns.
Who Will Be Audited?
The IRS’s revamped auditing efforts will concentrate on several key groups:
- Wealthy Individuals: Specifically, those whose income exceeds $10 million.
- Large Corporations: Targeting companies with assets above $250 million.
- Complex Partnerships: Focusing on entities with assets over $10 million.
- Business Aircraft Use: Scrutinizing corporations and high-income taxpayers who use business aircraft for personal purposes.
It’s important to note, as per IRS Commissioner Daniel Werfel, that individuals making under $400,000 and small businesses will not see an increase in audits due to these changes.
A Shift Towards Equity
In addition to targeting wealthier taxpayers, the IRS is also adjusting its focus to rectify historical imbalances in its audit practices. Recent studies, including a January 2023 report involving university researchers and the Treasury Department, highlighted a concerning trend: Black taxpayers and those claiming the Earned Income Tax Credit—a benefit designed for low- to moderate-income workers—were audited at disproportionately high rates. For instance, while Black taxpayers constituted 21% of the claims for this credit, they represented 43% of the audits related to it.
Responding to these findings, Werfel announced that the IRS has already taken significant steps to reduce the number of these audits and refine the criteria used to select cases for auditing. This move is part of a broader effort to restore public trust and ensure fair and equitable treatment in tax administration.
Looking Ahead
The IRS is committed to overhauling its compliance efforts by 2026 to promote a tax system that is not only effective but also fair and just. By focusing on high earners and large corporations, the agency aims to tackle the most significant sources of the tax gap without unduly burdening the less affluent or small businesses. Additionally, the IRS is taking strides to eliminate racial disparities in its audit processes, thereby fostering a more trustworthy and equitable tax environment.
What This Means for Taxpayers
For the average taxpayer, particularly those earning under $400,000 annually, these changes mean that the likelihood of being audited will not increase. However, for those in higher income brackets or involved in large-scale business operations, the message is clear: the IRS will be looking more closely at your returns and any potential discrepancies.
For all taxpayers, this shift underscores the importance of accurate tax filing and compliance. As the IRS enhances its capabilities and refines its focus, all taxpayers, regardless of income level, are reminded of the essential nature of fulfilling their tax obligations correctly and transparently.
In summary, the IRS’s strategic pivot aims to ensure that everyone pays their fair share, thereby upholding the integrity of the tax system and ensuring that necessary public services are adequately funded. This shift not only promises to close the tax gap but also to restore faith in the system’s fairness and effectiveness.
