After Congress approved billions of extra funding for tax compliance, the Internal Revenue Service pledged it would get tougher on rich taxpayers and corporations while avoiding extra scrutiny of middle-class households.
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New audit statistics hint that the tax collector is indeed combing through more tax returns filed by wealthy taxpayers — but it’s still too soon to say how tough the IRS gets with them, according to tax experts. And it’s too soon to be sure the taxman will go easy on less-wealthy households, even if there are encouraging signs, they add.
TaxWatch (January 2024): The IRS has collected more than $500 million in back taxes from delinquent millionaires
“It’s the golden question and there’s no golden answer yet,” said Pete Sepp, president of the National Taxpayers Union, a right-leaning taxpayer advocacy group.
For taxpayers worth at least $500,000, “certainly the audits are not dropping and would suggest a small rate of increase,” Sepp said.
Audit numbers released by the IRS on April 18 show what the agency was up to during its 2023 fiscal year, which ran from October 2022 to September 2023.
The figures give a glimpse into an agency that’s coming into a lot of money over the next decade after 2022’s Inflation Reduction Act.
The law’s $80 billion for tougher tax enforcement and better customer service at the IRS has been a flashpoint between Democrats and Republicans. The Biden administration agreed to redirect $20 billion as a part of last spring’s deal to raise the debt ceiling.
From the archives (March 2024): Biden set to share election-year tax vision, but the real question is what happens in 2025
The new IRS wave of enforcement includes a focus on undisputed but unpaid tax debts of households worth at least $1 million. The initiative has already recouped approximately $500 million, according to IRS Commissioner Danny Werfel, who is one year into his appointment. “That’s half a billion dollars recovered from fewer than 1,000 millionaires and billionaires,” Werfel told the Senate Finance Committee.
The IRS is also going after millionaire households that haven’t submitted tax returns and is preparing to ask questions of people who may have played fast and loose with tax rules on corporate-jet use.
The new IRS report shows what the IRS has been doing with the high-net-worth tax returns that have already been filed. Indeed, the audit rates on tax returns worth at least $500,000 are nudging higher, according to the new audit data.
In the most recent year of finalized audit data, the 2019 tax year, the IRS said it subjected 11% of returns with total positive income of at least $10 million to audits. One year earlier, 9.9% of these supersized returns were audited, and the year before that the audit rate was less than 7%.
There’s a lag in the data because, once a return is filed, the IRS says it generally has three years to comb through a return. If IRS auditors recommend a change, the taxpayer can agree and pay, or can dispute the supplemental bill.
The nearly 600,000 audits closed in fiscal year 2023, for returns of all sizes, recommended $31.9 billion in extra taxes, up from more than $30 billion a year earlier.
The newest batch of finalized audit numbers for wealthy-taxpayer returns shows there was “virtually no movement, but it’s a little,” said David Kautter, a former acting IRS commissioner during the Trump administration from 2017 to 2018.
In 2020, the Treasury Department told the IRS to audit at least 8% of income-tax returns worth $10 million.
“IRS was moving in that direction anyway,” said Kautter.
For now, the audit figures appear to show “more past momentum” than the direct effects of the Inflation Reduction Act, said Kautter, who served in the Treasury Department under Trump after heading the tax agency. The IRS was viewing 2023 as a year to try hiring up, he said, even as Republicans have seized on Democratic proposals to strengthen tax enforcement as an example of government overreach.
Key Words (September 2022): Kevin McCarthy, other top Republicans vow to scrap IRS hiring plans if they win House majority
Also see (August 2022): Fact check: No, the IRS is not hiring an 87,000-strong military force with funds from the Inflation Reduction Act
The new report shows IRS work during “a transitional year,” Werfel wrote in the report.
So what about audits for the rest of America’s taxpayers, not just the wealthy ones?
IRS and Treasury officials have pledged that households making less than $400,000 a year will not be audited any more frequently than “historical” rates. The audit rate for tax year 2018 is the baseline when it comes to households making up to $400,000 annually, Werfel has previously said.
In the newest batch of finalized audit data, for tax year 2019, the audit coverage rates are essentially identical to the 2018 rates for returns under $500,000. The audit rates are from 0.2% to 0.4%.
Generally, the audit rates for most returns under $100,000 have “rarely been terribly high in the past decade,” Sepp said. So that makes the pledge of no extra audits under $400,000 “a bit of a red herring,” he said.
What worries Sepp instead are the other things the IRS can do, short of an audit, to hold back taxpayer money. For example, he said there’s no income threshold for so-called math-error notices, where the IRS says a taxpayer goofed on a calculation for a credit or deduction.
Sepp’s concern is that the IRS could misuse and overuse things like the math-error notice.
Audits on a credit often used by lower- and middle-income households
Audit rates ticked lower for households claiming the earned-income tax credit, a credit for lower- and moderate-income working households. The IRS audited 0.8% of the returns claiming the credit in 2019, down from 0.9% in 2018.
The audits connected to this credit have been marred by a concern that they disproportionately affect Black taxpayers. Treasury Department and Stanford University researchers determined Black taxpayers were three to five times more likely to get audited on the credits, and the IRS said it would be revising its internal algorithms.
The lower audit rate on households claiming this credit is good news, so long as the IRS offers more help to taxpayers so they can correctly claim the credit, Sepp said.
It’s still too soon to determine how the IRS funding influx is going to impact taxpayer audits up and down the income ladder, said Andrew Lautz of the Bipartisan Policy Center, a think tank.
The agency is “only starting to spend that money” — and spending priorities and amounts could all change after the 2024 presidential election, he noted.
Looking ahead, there are budget negotiations and tax negotiations as many of the tax cuts that emerged from the Trump-era overhaul of the federal tax code expire at the end of 2025.
“I expect that rescinding more of that IRS funding from the Inflation Reduction Act will be a consistent and regular GOP ask in these negotiations,” Lautz said.
From the archives:
Would a beefed-up IRS bring in more tax revenue, as Biden says? Experts are divided
There’s a lot to love about tax season. No. Really.
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