As part of its Strategic Operating Plan, the IRS is ramping up efforts to audit taxpayers with complex tax filings and significant noncompliance to address major tax gaps. Key actions include using AI to target complex partnerships and new procedures to collect taxes directly from these entities. The IRS also plans to take stricter measures on estate planning strategies that allow tax-free wealth transfers across generations. The Government Accountability Office (GAO) has recommended that the IRS improve its enforcement by analyzing income and asset level data to better target high-wealth individuals.
Since 2010, audit rates for millionaires, large corporations, and partnerships have dropped dramatically due to budget cuts and a reduced audit workforce. In FY2022, only 1.1% of high-income individuals were audited. Recognizing the complexity and time required for these audits, the IRS plans to hire and train new staff, although it has yet to fully assess its specific staffing needs. The IRS has announced a new unit within the Large Business and International (LB&I) Division focusing on large or complex pass-through entities using Inflation Reduction Act funding. "This is another part of our effort to ensure the IRS holds the nation's wealthiest filers accountable to pay the full amount of what they owe," said IRS Commissioner Danny Werfel. "We are honing in on areas where we believe non-compliance among our wealthiest filers has proliferated over the last decade of IRS budget cuts, and pass-throughs are high on our list of concerns.” (Werfel)
Looking forward to the actual implementation of the Strategic Operating Plan and what that will realistically look like, the IRS plans to increase audits on the wealthiest taxpayers, large corporations, and complex partnerships by 2026. Audit rates for large corporations with assets over $250 million will nearly triple, rising from 8.8% in 2019 to 22.6%. Audit rates will increase tenfold for complex partnerships with assets over $10 million, from 0.1% in 2019 to 1% in 2026. Wealthy individuals with over $10 million in income will see audit rates rise by over 50%, from 11% in 2019 to 16.5% in 2026. The IRS will not increase audits for small businesses or those earning under $400,000. These rates will stay at historically low levels.
The IRS is hiring more staff to handle complex filings to further their efforts. Until recently, a gap existed between experienced compliance personnel and the number of high-income filers. An estimated 2,600 employees handled audits for 30,000 high-income individuals, 60,000 large corporations, and 300,000 large partnerships and S corps. To close this gap, the IRS has added 11,000 full-time positions since 2022, including audit staff and customer service roles. With funding from the Inflation Reduction Act, the IRS plans to add another 14,000 full-time positions by 2029.
With all this being said, it is clear that the IRS's Strategic Operating Plan represents a significant shift towards stricter enforcement on high-wealth individuals and large entities with complex tax situations. By leveraging AI and focusing on estate planning strategies, the IRS aims to close substantial tax gaps. The addition of a new unit within the LB&I division and hiring thousands of new staff members, supported by Inflation Reduction Act funding, underscores the agency's commitment to enhancing its audit capabilities. This new and improved approach ensures that the wealthiest taxpayers contribute their fair share while maintaining low audit rates for small businesses and lower-income individuals. As these measures take effect, the IRS expects to restore its auditing strength and address long-standing compliance challenges, ultimately promoting greater fairness in the tax system.
Hayley Bales
Marketing Communication Specialist
Protection Plus
Originally Published in NATP TAXPRO Magazine – September 2024
References
https://home.treasury.gov/news/press-releases/jy1393
https://www.cnn.com/2024/05/02/politics/irs-audit-tax-rates-wealthy/index.html