Tax Tip of the Week: IRS Plans to Increase Audit Rates of Wealthy Taxpayers by 50%

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Tax Tip of the Week | May 22, 2024 | IRS Plans To Increase Audit Rates of Wealthy Taxpayers by 50%

This Week's Quote:

“Alone, we can do so little.  Together we can do so much”
                                  - Helen Keller

The Internal Revenue Service detailed its plans Thursday to significantly ramp up audit rates of wealthy taxpayers and large corporations, using funds provided by the Democrat-backed Inflation Reduction Act that passed in 2022.

The audit rate of taxpayers earning more than $10 million is expected to increase by 50%, going up from 11% in 2019 to 16.5% in 2026.

The IRS also plans to triple the audit rates of large corporations with assets over $250 million, as well as increase the audit rates of business partnerships with assets over $10 million by tenfold over the seven-year period.

Despite the expected increases, audit rates won’t exceed those reached in 2010 because the number of filings by large corporations, partnerships and wealthy individuals have grown and become more complex, the IRS said.

The IRS is using the influx of money provided by the Inflation Reduction Act to modernize the agency, improve services for taxpayers and collect more tax revenue from those who have not been paying what they owe. But Republicans, concerned that small businesses and the middle class could be targeted by IRS auditors, have made several efforts to chip away at the agency’s funding.

IRS Commissioner Danny Werfel has repeatedly said the agency is committed to shielding American households that earn less than $400,000 a year from an increase in audit rates. Specifically, audit rates of those Americans will not exceed what they were in 2018, a record-low year, he said Thursday on a call with reporters.

“As I’ve said over and over again, there is no new wave of audits coming for middle- and low-income (taxpayers), coming for mom-and-pops. That is not in our plans in any way, shape or form,” Werfel said.

Ramping up audits with new staff and AI

Due to years of underfunding, IRS audit rates of large corporations and multimillionaires fell between 2010 and 2021. Overall staffing in the agency’s compliance offices declined 30% during that time.

To ramp up audits, the IRS is hiring the accountants, engineers, economists, data scientists, attorneys and tax experts needed to conduct complex audits.

Since 2022, the IRS has added about 11,000 full-time positions – including staff working on audits as well as those tasked with customer service and other jobs. The agency plans to add an additional 14,000 full-time positions with funding from the Inflation Reduction Act by fiscal year 2029, Werfel said Thursday.

Some new hires will be replacing people retiring or leaving. The increases would bring the number of total IRS employees to 102,500, Werfel said.

The IRS is also spending money on improving its technology. The agency is using artificial intelligence to help select what businesses to audit.

The agency’s efforts have so far recovered $520 million from millionaires who have either not filed their taxes or failed to pay their tax debt.

Changes to taxpayer services

The IRS is also using the funding from the Inflation Reduction Act to modernize taxpayer services. As a result, the agency was able to answer 1 million more calls this year than it did during the previous tax season.

The agency also served more people in person at Taxpayer Assistance Centers across the country.

Efforts to digitize the agency’s 1 billion pieces of paper are underway and improvements were made to the online tool known as “Where’s My Refund” so that taxpayers can get more real-time information about the status of their tax returns.

Earlier this year, the IRS launched a pilot version of its own tax filing service that allowed Americans to file their returns for free directly with the IRS.

More than 140,000 people used the program, known as Direct File, to successfully file their tax returns this year. The IRS has yet to make a decision about whether to continue the pilot project next year.

Battles of over funding

The Inflation Reduction Act, which passed without any Republican votes, approved about $80 billion for the IRS over a 10-year period.

But Republicans have made several efforts to claw back the money. In a deal to address the debt ceiling and avoid a US default last June, Democrats agreed to allow for $20 billion of the Inflation Reduction Act funds to be rescinded.

In January, Democrats conceded an acceleration of the $20 billion cut in an effort to get a full-year federal spending law passed in time to avoid a partial government shutdown.

Werfel warned Thursday about what is at risk if further cuts to IRS funding are made.

Under the current funding structure, the agency expects to run out of money from the Inflation Reduction Act allotted specifically for modernizing its systems by fiscal year 2026. That would mean that the IRS could not maintain its current level of phone service and it would drop back down so that 7 of 10 taxpayers’ calls would not be answered, the agency said.

Credit goes to Katie Lobosco, published May 2, 2024 in CNN.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.
This Week’s Author, Lance Bradstreet

-until next week

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