In his recent testimony before the Senate Finance Committee, IRS Commissioner Daniel Werfel reassured taxpayers that increased IRS funding would not lead to a surge in audit rates for small businesses and middle-class taxpayers. The Commissioner committed to using the 2018 audit rates, a year that marked a historic low for audits of taxpayers earning under $400,000, as the benchmark for future audits.
Historical Perspective on Audit Rates
Historically, in 2011, one in every 116 taxpayers from this group was audited. Following controversies over IRS audits of conservative political groups, the IRS’s budget remained unchanged for several years, leading to a decline in the audit rate for the under-$400,000 income bracket. By 2017, the rate had fallen to one in 222, dropping further to one in 301 by 2018.
Prioritizing Audits of High-Income Entities
Rather than intensifying scrutiny of lower-income brackets, the IRS will focus on approximately 390,000 high-income individuals, corporations, and complex partnerships. These entities often submit incredibly lengthy tax returns, sometimes exceeding 100,000 pages, necessitating an increase in IRS enforcement personnel. In anticipation of this, the IRS plans to invest an additional $4.3 billion in enforcement by 2027.
Upgrading Taxpayer Services and Computer Systems
Before this enforcement ramp-up, the IRS prioritized improving taxpayer services and modernizing its aging computer systems. An investment of $1 billion annually for three years, beginning in fiscal 2024, has been earmarked for these essential upgrades.
Improvements in IRS Taxpayer Service
Following criticisms of poor taxpayer service during the 2022 filing season, when only 15% of taxpayers successfully reached an IRS agent by phone, the agency has made significant improvements. Commissioner Werfel reported that the average wait time in the 2023 tax season was reduced to 4 minutes, and the successful connection rate climbed to 87%.
Audit Distribution and Error Rates
In 2018, of the 504,097 audits conducted on returns with less than $500,000 of income, about half focused on returns with less than $25,000. The IRS attributes this focus to the high error and fraud rates associated with claims for this group’s earned income tax credit.
Reassurance for Small Businesses
In closing, Commissioner Werfel assured small businesses, including neighborhood mom-and-pop stores, clothing retailers, and auto repair shops, that they need not fear an onslaught of new audits. He affirmed that such a dramatic audit increase is not on the IRS’s agenda.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or connect@lptrust.com.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.
