IRS to Double Audit Rate: Strengthening Tax Compliance and Narrowing the Gap

The IRS will double its audit rate for individual tax returns in the coming years to boost tax compliance and narrow the tax gap, which is the difference between taxes owed and taxes paid.

IRS to Double Audit Rate

The Internal Revenue Service (IRS) is gearing up for a more assertive tax enforcement strategy. In a recent update to its strategic plan, the agency outlined its intention to significantly increase audit rates for high-income earners and large corporations. 

This move comes after an influx of funding allocated in the Inflation Reduction Act of 2022. The most substantial increase is targeted towards taxpayers with total positive income exceeding $10 million.

The IRS anticipates this multi-pronged approach will yield several positive outcomes. Improved tax compliance among high earners and large businesses is expected to generate additional revenue for the government. 

Who Qualifies for the IRS to Double Audit Rate?

The IRS’s plan for a double audit rate targets specific groups with the aim of closing the tax gap. The specific groups are:

  • High-Income Earners: The primary focus is on individuals with total positive income exceeding $10 million.This category includes:
    • High-profile CEOs and business owners
    • Professional athletes and entertainers
    • Investors with significant capital gains
    • Heirs and inheritors of large estates

The IRS aims to more than double the audit rate for this group, bringing it to an estimated 16.5% by 2026. This signifies a significant increase compared to the 2019 rate of 10%.

  • Large Corporations: Entities with assets surpassing $250 million are also facing heightened scrutiny. The IRS plans to nearly triple the audit rate for these corporations. This includes:
    • Multinational corporations
    • Large domestic companies with complex financial structures

Increased scrutiny ensures these corporations are adhering to tax regulations and reporting all income accurately.

  • Complex Partnerships: Partnerships with assets exceeding $10 million can expect a tenfold increase in audit rates. These partnerships can involve:
    • Hedge funds
    • Private equity firms
    • Real estate investment trusts (REITs)

The complex nature of these partnerships often requires in-depth examination to ensure accurate tax reporting.

Assurance for Small Businesses and Middle-Income Taxpayers

The IRS emphasises that these increased rates won’t impact audit rates for:

  • Small businesses: This includes most sole proprietorships, partnerships, and corporations with less than $250 million in assets.
  • Middle-income earners: Those making under $400,000 are expected to see rates remain at historically low levels.

This distinction underscores the agency’s targeted approach aimed at closing the tax gap specifically among high-wealth individuals and large corporations.

Reasons Behind the IRS Doubling Audit Rates 

The IRS’s decision to significantly increase audit rates for high earners and large businesses stems from various factors aimed at improving tax compliance and revenue generation. The main reasons are:

  • Closing the Tax Gap: The primary driver is the substantial tax gap, estimated at a staggering $600 billion. This represents the difference between taxes owed and taxes actually collected. 
  • The IRS believes focusing on high-wealth individuals and large corporations with complex tax filings offers the greatest potential for recouping lost revenue.
  • Complexity of High-Income Filings: Tax returns for high earners often involve intricate financial instruments,business ventures, and international transactions. 
  • These complexities make it more challenging for the IRS to identify potential discrepancies using traditional methods. Increased audits provide a more thorough examination of these filings, ensuring accurate tax reporting.
  • Resource Boost from Inflation Reduction Act: The recent influx of funding allocated in the Inflation Reduction Act has empowered the IRS to bolster its enforcement capabilities. 
  • It includes investments in technology,personnel, and data analysis tools specifically designed to tackle complex tax filings associated with high earners and large corporations.
  • Deterrence of Future Non-Compliance: A heightened audit risk for high earners and large businesses can serve as a deterrent against future tax delinquency. 

The Impact of Double Audit Rates on Taxpayers

The IRS’s decision to double audit rates for high earners and large businesses will have varying effects on different taxpayer groups:

For High Earners and Large Businesses:

  • Increased Scrutiny: These taxpayers can expect a significantly higher chance of facing an audit. This necessitates meticulous record-keeping practices and close collaboration with qualified tax professionals to ensure accurate and compliant filings.
  • Potential Tax Liabilities: Audits can uncover errors or underpayment of taxes. This could lead to additional tax assessments, interest charges, and even penalties.
  • Increased Costs: The audit process itself can be time-consuming and expensive. Taxpayers may incur fees for professional representation and accounting services to navigate the audit procedure.

For Small Businesses and Middle-Income Taxpayers:

  • Minimal Impact: The IRS has assured that audit rates for small businesses and middle-income earners will stay at historically low levels, indicating minimal change in their likelihood of being audited.
  • Potential Indirect Benefit: The IRS’s focus on high earners and large businesses could allow for more resources to improve service and support for small businesses and middle-income taxpayers.

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