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IRS to Shift General Focus of Audits from Low- to High-Income Taxpayers

Ruth Singleton
Published Date:
Sep 19, 2023

Using funding from the Inflation Reduction Act, passed a year ago, the IRS will begin to increase the audit rate of high-income taxpayers and large corporations and decrease the audit rate of low-income taxpayers, who often rely on refundable credits.

In a Sept. 18 letter to Sen. Ron Wyden (D-Ore.), chair of the Senate Committee on Finance,  IRS Commissioner Daniel Werfel said that the agency will be "rebalancing effort[s] ... around high-income and high-wealth individuals, complex partnerships, and large corporations who are not paying the taxes they legally owe," while "substantially reducing the number of correspondence audits focused specifically on certain refundable credits, including the Earned Income Tax Credit (EITC), American Opportunity Tax Credit, Health Insurance Premium Tax Credit, and Additional Child Tax Credit."

Werfel explained, "This effort also recognizes that the vast majority of taxpayers want to comply with tax law. We aim to make this simpler and easier to do, while allowing taxpayers to interact with the IRS in the ways that work best for them. For the first time, and thanks to the new resources provided by the [Inflation Reduction Act], the IRS will help taxpayers identify mistakes before filing, quickly fix errors that delay their refunds, and claim the credits and deductions they are eligible for. Helping taxpayers get it right at the time of filing will reduce the need for the IRS to contact taxpayers through notices, correspondence audits, and other enforcement activities. To that end, the changes we are making benefit all Americans by promoting fairness and accuracy and protecting all taxpayers from scams and schemes."

Werfel added that " IRS staff are closely examining potential non-compliance among large, complex partnerships, including 75 of the largest partnerships in the U.S. identified as higher risk for tax compliance with the help of new AI tools as well as hundreds of partnerships with over $10 million in 2 assets and balance sheet discrepancies. In the near term, we will be sharing details regarding our stepped-up activities to address non-compliance among large corporations. These changes, which leverage the IRA’s investment in modernized technology, expanded data science, and right sizing of our workforce, will significantly improve the IRS’s ability to address the tax gap, which was projected to be $540 billion per year for 2017-2019."

The IRS announced earlier this month that it would significantly increase its enforcement efforts in tax compliance by turning more attention to high-income earners, large corporations and large partnerships such as hedge funds, real estate firms, and law firms.

Werfel also addressed racial disparities that have been found in audit rates. "[R]ecent research using imputed race information estimated that Black taxpayers are audited at three to five times the rate of non-Black taxpayers. This research, the general findings of which IRS and Treasury’s ongoing internal work has validated, demonstrated that the volume of exams focused on the EITC that the IRS performs is a major driver of overall disparity. The realignment to focus on high-end tax evasion and any bad actors who contribute significantly to the tax gap will therefore help reduce this disparity, in addition to its other beneficial effects for tax administration, by achieving greater balance in our examination of different sources of non-compliance."

He also said that the IRS would be devoting more resources to addressing unscrupulous preparers and other bad actors, and to "reaching underserved communities to provide education and real-time assistance in claiming available credits and incentives."

He concluded, "In summary, we are making broad efforts to overhaul compliance efforts in a manner that robustly advances our commitment to fair, equitable, and effective tax administration."

In response to the letter, Wyden issued a statement praising the IRS's efforts. "I'm pleased to see the IRS using the enforcement funding from the Inflation Reduction Act to help lower-income taxpayers catch mistakes from the start and identify credits they are eligible for, while reserving enforcement resources to crack down on wealthy tax cheats and those who prey on vulnerable filers," he said. "This is exactly why Congress boosted funding for the IRS. By revisiting the EITC audit selection process and focusing audit activity on the wealthiest taxpayers who are dodging taxes, rather than working people who are just trying to comply, the IRS is taking important steps to address the racial disparities in audit selection identified earlier this year. I am encouraged by the IRS's pilot programs and look forward to continued updates on the IRS's progress in addressing these racial disparities."

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