Two years after getting billions of dollars to toughen up on wealthy taxpayers while keeping audit rates the same for most Americans, a new report from a watchdog group says the IRS still hasn’t decided how to keep track of how many audits it does for people making less than $400,000 a year.
It was released Thursday by the Treasury Inspector General for Tax Administration. It said that the IRS “has made limited progress” on building its method and needs to move faster.
The IRS replied that it still had time to decide on a final plan, but it agreed to move more quickly.
The tax collector said that they are still working out a technical issue with audit rates, but they have been using their extra money in other ways to give extra attention to wealthy taxpayers without affecting most taxpayers.
“As the IRS continues to work to formalize its methodology for audit-rate reporting, our focus on high-end enforcement will continue,” the agency told MarketWatch in a statement. The statement made it clear that the agency is focusing on people making over $400,000.
The agency mentioned several ongoing projects, such as a crackdown on millionaires who are behind on their taxes, rich families who didn’t file their taxes, questionable write-offs for corporate jet use, and a new round of audits for complicated, large partnerships.
The TIGTA report was mostly about the IRS’s efforts to make sure that its extra funds aren’t used to increase the number of audits of people who make less than $400,000 a year. But there’s a longer story behind this.
When Democrats ran Congress two years ago, they passed the Inflation Reduction Act, which gave the IRS $80 billion over ten years. More than half of that money was supposed to pay for bigger tax checks on big businesses and wealthy people.
Republicans were angry about the extra money and said it could make the tax man look more closely at everyone. Treasury Secretary Janet Yellen said that the extra money would not be used to audit more homes and small companies that make less than $400,000 “relative to historical levels.”
About $20 billion of the $80 billion in funding was taken back after talks to raise the debt cap in 2023.
The “base year” for income tax reports was chosen by the IRS to be 2018. It is now figuring out the “audit coverage rate” for 2018 returns of up to $400,000 so that it doesn’t go over that rate in the future.
The IRS does already divide audits into parts based on income. The IRS data shows that between 0.2% and 0.4% of reviewed 2018 tax returns had total positive income between $1 and $500,000.
The story said it will be hard to draw the new $400,000 line, which is very important. More than nine out of ten reports from 2019 to 2023 were of taxpayers whose total income was less than $400,000. The IRS says that gross income will be used to set the $400,000 limit. Gross income is all of a person’s stated income minus any losses.
One of the hardest things for the IRS is coming up with a way to count returns from people who make at least $400,000 a year but report less than that amount.
Tax officials thought about leaving out some audits from the count, but TIGTA officials said that would give the IRS too much freedom to pick and choose. The story said that the IRS gave up on the idea of not doing some audits.
A second problem is figuring out what a “small business” is for tax and audit reasons. This is a problem for making the audit coverage rate, the report said.
Starting with 2023 tax returns, people who make less than $400,000 will not be audited as often as they have been in the past. These tax returns were turned in earlier this year, but they won’t be looked at until the 2025 fiscal year for the federal government.
The story said that the fiscal year for 2025 begins in October. “We think the IRS needs to speed up the completion of its plan to meet the Treasury Secretary’s Instructions,” the study said.
The IRS is working to find out how often people making less than $400,000 are audited. However, that income level may play an even bigger role in tax policy.
The Democratic presidential candidate, Vice President Kamala Harris, has kept a promise made by President Joe Biden: if she wins in November, she will not raise taxes on families making less than $400,000.
Former President Donald Trump, on the other hand, has promised that if he wins, he will keep the tax cuts he made in 2017 and maybe even lower them.
