Key Takeaways
- The IRS received $80 billion in funding as part of the Inflation Reduction Act of 2022.
- Expanded enforcement, including more audits, is one way the IRS plans to use the money.
- Large corporations, complex partnerships and high-income/high-wealth individuals are the targets of expanded enforcement activities.
- Audit rates aren’t expected to change for those earning less than $400,000.
Expanded enforcement, including more audits, is one way the IRS plans to use the money.
In 2022, the Inflation Reduction Act allocated $80 billion in funding for the Internal Revenue Service and touched off a firestorm of controversy. Internet rumors swirled, with some saying the money would allow the agency to send 87,000 armed agents into the field to conduct audits.
Now, two years later, that army of auditors hasn’t materialized – not that it was ever even planned, according to tax experts. However, the IRS has stepped up some enforcement activity. It has also dramatically improved its customer service, rolled out a free Direct File pilot program and made strides toward modernizing its technology.
“Much of what they are doing with their money is to improve the IRS, not audit you,” says Bill Smith, national director of tax technical services for CBIZ MHM’s National Tax Office. “They are trying to be more user-friendly.”
While audits will be increasing, lower- and middle-income families probably don’t have to worry about their chances of being audited increasing. High-net worth individuals, complex partnerships and big businesses seem to be the target of IRS enforcement efforts.
How the IRS Planned to Use New Funding
While the $80 billion allocation to the IRS may have been a surprise to the general public, the agency says it had previously been underfunded. IRS funding, in real terms, dropped 18% from 2010 to 2021, according to a 2024 supplement to the IRA Strategic Operating Plan.
That plan was initially announced in 2023 and laid out five objectives for how the IRS would use funding from the Inflation Reduction Act:
- Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible
- Quickly resolve taxpayer issues when they arise
- Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap
- Deliver cutting-edge technology, data and analytics to operate more effectively
- Attract, retain and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers
The plan outline spans from 2023 to 2031, and in April 2024 the IRS shared its progress in an annual update.
Audits Target Large Businesses, Wealthy Individuals
The Strategic Operating Plan calls for expanded “compliance programs” for three categories of taxpayers:
- Large corporations
- Complex partnerships
- High-income and high-wealth individuals
In this context, high-income individuals are considered those earning at least $1 million, according to Miri Forster, national leader of the tax controversy practice for accounting firm Eisner Advisory Group LLC in New Jersey.
“(The IRS) is committed to not increasing the (audit) rates for small taxpayers earning less than $400,000,” she adds.
Auditing lower income households may be politically unpopular, but there could also be a practical reason for focusing on big businesses and wealthy individuals.
“They are trying to maximize the return on their spending,” says Mary Sasmaz, an assistant professor of accountancy in the Weatherhead School of Management at Case Western Reserve University.
The IRS doesn’t want to spend resources tracking down and auditing small taxpayers who may only owe a modest sum to the government. Rather, it makes more sense financially to focus on accounts that could owe a significant amount.
“You have a bigger bang for your buck doing that,” Smith says.
For the first wave of enforcement, the IRS sent 125,000 letters to people who make more than $400,000 but have not filed a return since 2017. With efforts concentrated among individuals with more than $1 million in income and $250,000 in recognized tax debt, the IRS has recovered $520 million as of January 2024.
Middle Class Audits Won’t Disappear
While the IRS isn’t ramping up audits of lower- and middle-income households, that doesn’t mean you won’t get audited.
“There are multiple ways you can be selected for an audit,” Sasmaz says. The IRS doesn’t publish how people are selected, but the number of taxpayers subject to an audit is quite low.
Only 0.29% of 2019 individual tax returns with positive income were audited as of March 2023, according to a report from the Congressional Research Service. Actual audit rates varied by income and broke down as follows:
- $1 to $25,000 income: 0.44% audit rate
- $25,000 to $500,000 income: 0.20% audit rate
- $500,000 to $1 million income: 0.68% audit rate
- $1 million to $5 million income: 1.47% audit rate
- $5 million+ income: 2.70% audit rate
The vast majority of these – 85% – were correspondence audits that involved taxpayers returning requested documentation by mail rather than meeting with an IRS agent.
“We tend to fear the IRS,” Sasmaz says, “but so long as you have been truthful on your return, the audit process is more of an inconvenience than anything else.”
While audits aren’t expected to increase for those making less than $400,000, that doesn’t mean the IRS isn’t keeping an eye on those taxpayers. One of the Strategic Operating Plan’s initiatives calls for an increase in enforcement activities in other key areas where audit coverage has declined.
“I think they are going to use other approaches to deal with enforcement,” Forster says. That may include sending more notices and letters to those the IRS believes are in noncompliance in an effort to encourage voluntary compliance with tax laws and regulations.
Bottom Line for Lower- and Middle-Income Taxpayers
According to many tax experts, the net result of increased funding for the IRS will be positive for most lower- and middle-income families.
“We’ve gone from the sky is falling to a more reasoned approach,” Smith says of the response to the influx of cash to the IRS.
Perhaps the most notable positive outcome from the funding is the vast improvement in phone service for taxpayers. In 2021, the IRS received 282 million calls, but only 11% of those actually reached a customer service representative. People may have been left on hold indefinitely or booted from the system before reaching a live person.
The Inflation Reduction Act allowed the IRS to hire thousands of new staff members to answer calls, and average wait times dropped to three minutes in 2024. The money was also used to improve online tools and launch a Direct File pilot program, which allowed 140,000 people in 12 states to file returns directly with the IRS using a free online system.
Combined, these improvements promise to make it easier for taxpayers to communicate with the IRS and complete what may be one of the most unpleasant tasks of the year: filing an income tax return.
