Last week, the Treasury Inspector General for Tax Administration (TIGTA) released a report examining the 2020 Treasury Directive issued by then-Treasury Secretary Steven Mnuchin. This directive required the IRS to annually audit at least 8% of individual tax returns from those with an adjusted gross income of more than $10 million, dating back to tax year 2016. The report found that while the IRS initially met this goal in 2018. 2019 and 2020, it has since shifted its focus to auditing taxpayers at 400k+ earners.
Under a 2022 directive from Secretary Janet Yellen, as part of the Inflation Reduction Act’s $60 billion in IRS enforcement funding, the IRS now target audits are directed at upper middle-class Americans.
TIGTA’s analysis revealed that between tax years 2016 and 2021, audits of individuals with incomes of $10 million or more resulted in assessments of over $574 million, averaging $124,389 per return and $2,220 per hour of IRS work. In contrast, audits on incomes between $400,000 and $10 million averaged only $31,000 per return and $1,100 per hour.
The report also noted a trend: 63% of audits last year targeted those earning less than $200,000. Damien Brady, vice president of research for the National Taxpayers Union Foundation, criticized this shift, highlighting concerns that the IRS might be targeting lower and middle-income earners who may simply be confused about tax preparedness issues.
Brady expressed other concerns with the upcoming requirement for 1099k statements on all electronic payments, including PayPal and Venmo, which could categorize many individuals as small businesses for IRS audit purposes.
Additionally, the report highlighted that the Large Business and International Division’s audits were more effective before the 2020 directive. The “no change” rate for audits of returns with incomes of $10 million or more increased from 26% in 2016-2017 to 54% in 2018-2020, partly due to workforce attrition.
The inspector general recommended that the IRS track the productivity of audits on taxpayers earning $10 million or more separately. The IRS partially agreed, stating it already monitors such information but disagrees with comparing specific income levels.
Despite the increased funding from the Inflation Reduction Act, the IRS reported in May that it might need to downsize its workforce by 2026 without additional funding, complicating its enforcement capabilities.
Congressional Republicans have attempted multiple times to cut IRS funding to reduce audits on middle class and upper middle-class earners. Republicans were successful in cutting $10 billion in fiscal year 2024 and overall $20 billion of the $80 billion the IRS was set to receive as part of Biden’s Inflation Reduction Act, as part of the debt ceiling agreement made earlier this year.
Why are they not just flagging those returns with suspicious deductions or calculation errors?