Critiquing the IRS’s Increased Audit Rates

Critiquing the IRS’s Increased Audit Rates

The Internal Revenue Service (IRS) recently announced its plan to significantly increase audit rates for large corporations, partnerships, and multimillionaires over the next three years. The agency aims to ramp up enforcement spending and hiring to boost collections from high-income entities. The strategic operating plan involves targeting a near tripling of the audit rate on corporations with assets exceeding $250 million to 22.6% by the 2026 tax year, a significant increase from the 8.8% rate in 2019. Similarly, for complex partnerships with assets over $10 million, the IRS intends to increase audit rates nearly 10-fold, aiming for 1% by 2026, up from 0.1% in 2019. Additionally, the agency plans to raise audit rates by 50% for individuals with total annual income exceeding $10 million, targeting a rate of 16.5% in 2026, compared to 11% in 2019.

Despite the significant increase in audit rates for wealthy individuals and corporations, the IRS emphasized that audit rates for individuals and small businesses earning under $400,000 would not be raised. This decision aligns with President Joe Biden’s commitment not to increase taxes on this population. The focus on high-income entities is part of a broader effort to close the “tax gap” between taxes owed and those actually collected, estimated at $7 trillion over a decade.

The IRS plans to utilize $60 billion in funding from the 2022 Inflation Reduction Act to support these enforcement efforts. The agency outlined its allocation strategy, with $7.25 billion earmarked for fiscal 2024, up from $3.4 billion in fiscal 2023. Subsequent years will see increased spending, with $9.3 billion planned for fiscal 2025 and $7.3 billion for fiscal 2026. Over the entire decade through fiscal 2031, the IRS intends to spend a total of $57.82 billion on enforcement activities.

The IRS Commissioner, Danny Werfel, praised the agency’s focus on tax enforcement following years of underfunding that compromised taxpayer service and enforcement capabilities. However, critics, particularly Republicans, have pushed back against the increased spending, characterizing it as undue harassment of taxpayers by the IRS. Despite the initial approval of $80 billion over a decade to modernize IRS systems and enhance taxpayer services, partisan disputes have led to budget cuts that may hinder the agency’s enforcement objectives.

To support the ramped-up enforcement efforts, the IRS has hired a significant number of new staff. In fiscal 2023, the agency brought on 13,661 new employees, including 10,518 in taxpayer services and 495 in enforcement roles. The plan is to increase staffing further, with a goal of 16,314 hires in fiscal 2024, including 4,088 enforcement staff. Despite these recruitment efforts, there are concerns that the IRS may fall short of Werfel’s vision for a workforce exceeding 100,000 within the next three years.

The IRS’s decision to increase audit rates for high-income entities reflects a strategic shift towards more aggressive tax enforcement. While the agency aims to close the tax gap and improve compliance among large corporations and wealthy individuals, the plan has sparked controversy and political debate. The success of these efforts will depend on effective implementation, adequate funding, and skilled staffing to carry out the enhanced enforcement activities.

Economy

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