After Congress approved billions of dollars in additional tax compliance funding, the Internal Revenue Service promised to crack down on rich taxpayers and corporations while avoiding additional scrutiny of middle-class households.
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New audit statistics suggest that the tax collector is actually combing through more tax returns from wealthy taxpayers – but it’s too early to tell how harshly the IRS is treating them, tax experts say. And it is still too early to be sure that the tax office will go easy on less wealthy households, even if there are encouraging signs, they add.
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“That’s the golden question and there is no golden answer yet,” said Pete Sepp, president of the National Taxpayers Union, a right-wing taxpayer advocacy group.
For taxpayers worth at least $500,000, “audits are certainly not decreasing and suggest a small rate of increase,” Sepp said.
Audit numbers released by the IRS on April 18 show what the agency planned to do in fiscal year 2023, which ran from October 2022 to September 2023.
The numbers provide a glimpse into an agency that stands to make big money over the next decade following the 2022 Inflation Reduction Act.
The bill’s $80 billion for tougher tax enforcement and better customer service at the IRS has been a point of contention between Democrats and Republicans. The Biden administration agreed to reallocate $20 billion as part of last spring’s deal to raise the debt ceiling.
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The IRS’s new wave of enforcement focuses on undisputed but unpaid household tax debts worth at least $1 million. The initiative has already raised about $500 million, according to IRS Commissioner Danny Werfel, who has been appointed for a year. “That’s half a billion dollars collected from fewer than 1,000 millionaires and billionaires,” Werfel told the Senate Finance Committee.
The IRS is also targeting millionaire households that haven’t filed tax returns and is preparing to ask questions of people who may have played lightly with the tax rules for corporate jet use.
The new IRS report shows what the IRS did with already filed tax returns for high net worth individuals. In fact, audit rates are trending upward for tax returns worth $500,000 or more, according to new audit data.
In the most recent year of final audit data, tax year 2019, the IRS reported that it audited 11% of tax returns with positive total income of at least $10 million. A year earlier, 9.9% of these oversized returns were audited, and the year before that, the audit rate was less than 7%.
There is a lag in the data because the IRS says it typically has three years after filing a tax return to audit a tax return. If IRS auditors recommend a change, the taxpayer can agree and pay or dispute the additional bill.
The nearly 600,000 audits completed in fiscal 2023 on returns of all sizes resulted in $31.9 billion in additional taxes, up from more than $30 billion the previous year.
The latest final audit numbers for wealthy taxpayers’ tax returns show there has been “virtually no movement, but it is a little,” said David Kautter, a former acting IRS commissioner during the Trump administration from 2017 to 2018.
In 2020, the Treasury Department required the IRS to audit at least 8% of income tax returns valued at $10 million.
“The IRS was moving in that direction anyway,” Kautter said.
For now, the audit numbers appear to show “more past momentum” than the direct impact of the Inflation Reduction Act, said Kautter, who served at the Treasury Department under Trump after leading the tax agency. The IRS views 2023 as a hiring year, he said, even as Republicans have seized on Democrats’ proposals to strengthen tax enforcement as an example of government overreach.
Keywords (September 2022): Kevin McCarthy and other top Republicans vow to scrap IRS hiring plans if they win the House majority
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The new report shows the IRS’s work during a “transition year,” Werfel wrote in the report.
So what about audits for the rest of American taxpayers, not just the rich?
IRS and Treasury Department officials have pledged that households making less than $400,000 a year will not be reviewed more frequently than “historic” rates. The audit rate for the 2018 tax year is the baseline for households with annual income of up to $400,000, Werfel previously said.
In the latest batch of final audit data for tax year 2019, audit coverage rates are essentially identical to 2018 rates for returns under $500,000. The inspection rates are between 0.2% and 0.4%.
In general, audit rates for most returns under $100,000 “have rarely been particularly high over the past decade,” Sepp said. Therefore, the pledge not to undertake additional audits under $400,000 is “kind of a diversionary tactic,” he said.
What worries Sepp, however, are the other things the IRS can do, aside from an audit, to withhold taxpayer money. For example, he said there is no income limit for so-called math error reports, in which the IRS claims a taxpayer made a mistake when calculating a credit or deduction.
Sepp’s concern is that the IRS could abuse and overuse things like math error reporting.
Reviews of a loan commonly used by low- and middle-income households
Testing rates fell for households that claimed the Earned Income Tax Credit, a credit for low- and middle-income working households. The IRS audited 0.8% of returns claiming the credit in 2019, up from 0.9% in 2018.
The audits surrounding this credit have been clouded by concerns that it disproportionately affects Black taxpayers. Researchers at the Treasury Department and Stanford University found that black taxpayers are three to five times more likely to be audited for their credits, and the IRS said it would overhaul its internal algorithms.
The lower audit rate for households claiming the credit is good news as long as the IRS provides more help to taxpayers so they can claim the credit correctly, Sepp said.
It’s too early to determine how the influx of IRS funds will affect taxpayers’ audits up the income ladder, said Andrew Lautz of the Bipartisan Policy Center, a think tank.
The agency is “just starting to spend this money” — and spending priorities and amounts could change after the 2024 presidential election, he noted.
Looking ahead, budget negotiations and tax negotiations are coming up as many of the tax cuts resulting from Trump’s federal tax code overhaul expire at the end of 2025.
“I expect that removing additional IRS funding from the Inflation Reduction Act will be a consistent and regular request from Republicans in these negotiations,” Lautz said.
From the archives:
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