IRS Plans MAJOR Increase In Audits — Should You Be Scared?

By Lisa Pelgin | Sunday, 05 May 2024 01:00 AM
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IRS Plans MAJOR Increase In Audits — Should You Be Scared?
Image Credit : Government Accountability Office (GAO)

The Internal Revenue Service (IRS) has announced plans to significantly increase audit rates for large corporations, partnerships, and multimillionaires over the next three years.

This decision comes in the wake of substantial funding increases provided by the Biden administration.

In a press release issued on Thursday, the IRS stated its intention to nearly triple its audit rate to 22.6% for corporations with assets exceeding $250 million by the 2026 tax year. This represents a significant increase from the 8.8% audit rate in 2019.

The IRS also plans to increase audit rates for complex partnerships with assets over $10 million nearly tenfold, reaching 1% in the 2026 tax year, a significant jump from the 0.1% rate in 2019.

Furthermore, the IRS aims to increase audit rates by 50% for individuals with a total positive annual income exceeding $10 million. By the 2026 tax year, 16.5% of these high-income individuals will be subject to an audit, an increase from 11% in 2019.

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However, the IRS has assured that it will not increase audit rates for individuals and small businesses earning less than $400,000, in line with President Joe Biden's commitment not to raise taxes for this demographic.

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The IRS's ability to increase audit rates has been bolstered by an $80 billion funding injection provided by the Inflation Reduction Act (IRA), signed into law by President Biden in 2022.

An IRS audit involves a meeting between the individual or business leader and an auditor to review the accuracy of a federal tax return. The auditor may request additional documentation to support claims such as reductions and credits cited in the return. Discrepancies can lead to tax evasion charges, which carry a civil fraud penalty of 75% of the understated tax and, in severe cases, the possibility of imprisonment.

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The IRS's strategic operating plan, funded by the Inflation Reduction Act, outlines these forthcoming changes. The plan aims to modernize the IRS's outdated computer systems, improve taxpayer services, and increase enforcement to close the "tax gap" between taxes owed and those collected.

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Of the new funds, $7.25 billion will be spent in fiscal 2024, marking an increase from the $3.4 billion spent in fiscal 2023. The initial strategic operating plan called for fiscal 2024 spending at $5.8 billion.

IRS Commissioner Danny Werfel said in a statement, "The changes outlined in this report are a stark contrast to the years of under-funding that deteriorated taxpayer service and tax enforcement, frustrating taxpayers, the tax community, and IRS employees alike."

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However, Republicans have criticized the IRS audits as harassment of Americans over their taxes and have successfully reduced the funding. A top-line spending deal is set to cut the funding by $20 billion this year.

The IRS reported hiring 13,661 people in fiscal 2023 using Inflation Reduction Act funds, including 10,518 taxpayer services staff and 495 enforcement staff. It plans to increase these hires to 16,314 in fiscal 2024, including 4,088 enforcement staff.

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The report indicated that the hiring would support a total IRS workforce of about 93,000 by 2028, up from 88,411 estimated for fiscal 2024. This falls short of Werfel's goal for an IRS workforce of more than 100,000 within the next three years.

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