IRS To Bolster Audit Rates Of High-Income Individuals

After coming under sharp criticism in Congress over its lagging audit numbers, the Internal Revenue Service is taking steps to increase its audit rates of higher-income taxpayers. The IRS released their Data Book for 2021, which contains a wealth of statistics on examination rates, the response to the COVID-19 pandemic, the provision of advance Child Tax Credits and Economic Impact Payments, along with the usual information on the number of returns processed, revenue collected, and tax refunds issued. In conjunction with the release of its annual data book, the IRS released a separate statement providing an update on its latest audit numbers, pointing to the approach on increasing its audits of higher-income taxpayers.

The move comes after recent reports from the Treasury Inspector General for Tax Administration (TIGTA), and Syracuse University’s Transactional Records Access Clearinghouse (TRAC) found audit rates plummeting for wealthier taxpayers. For lower-income taxpayers, the IRS can often use technology to spot discrepancies between the tax returns filed by individual taxpayers and the information returns filed by their employers and other businesses to target them for examination. In the statement, the IRS highlighted recent data showing an uptick in audit rates. While the audit rates for EITC recipients and those earning less than $50,000 remained stable, the audit rate for those with over $10 million in positive income jumped from 2.0% in the fiscal year ending Sept. 30, 2021, to 8.7% in recent months. However, the IRS acknowledged that it is facing resource constraints, with fewer employees meeting the necessary expertise to conduct audits of high-income taxpayers who may have sophisticated, complex tax strategies.

During an oversight hearing in March, IRS Commissioner Chuck Rettig argued that the IRS was not targeting lower-income taxpayers, pointing to the IRS Data Book, the latest edition of which had not been released at that point. Commissioner Rettig blasted Syracuse University’s TRAC report, and in turn, TRAC called on the IRS to release the latest numbers. The release of the fiscal year 2021 Data Book, which covers the period from Oct. 1, 2020, to Sept. 30, 2021, and the additional statement from the IRS sheds light on the moves the IRS has been making to counter the argument that it is targeting lower-income taxpayers for audits.

In conjunction with the Data Book release, Rettig also highlighted the hard work the agency had been performing to respond to the pandemic and the various forms of tax relief and stimulus payments delivered. In the Data Book, the IRS reported that overall, net revenue through enforcement by the collection function equaled almost $60 billion, an increase of 54% over the prior year. As part of its collection activities, the IRS saw an increase in the use of payment plans. Nearly 2.4 million taxpayers set up new payment plans and installment agreements with the IRS during the fiscal year 2021, an increase of 29% compared to FY 2020. The IRS collected nearly $13.7 billion through installment agreements in 2021, up 9% from the prior fiscal year.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.