Are More Audits in Taxpayers’ Future?

The IRS asked for $80 billion in extra funds, got it, and has plans for it. (Dreamstime/TNS)

By Joy Taylor From Kiplinger’s Personal Finance

Question: Why did Congress give the IRS (Internal Revenue Service) so much more money? Does this mean we all will be subject to more audits?

Answer: The rising tax gap is one reason the IRS asked for $80 billion in extra funds—and got it. The tax gap is the difference between the amount of taxes owed and what the IRS collects.

The revenue lost from tax cheating is rising—$496 billion yearly from 2014 through 2016, according to new IRS data. Of this, the IRS says it will be able to recoup $68 billion through audits and other enforcement measures. And the tax gap is projected to go even higher: $540 billion for each year for 2017 through 2019 or $470 billion annually after audits and enforcements.

What comprises the biggest chunk? Unreported individual business income. Payroll taxes and underreporting by regular corporations are other areas of concern.

IRS audits have dropped dramatically over the past decade, especially exams of wealthy individuals, big corporations and pass-through entities. The IRS now audits about 2 percent of individuals reporting incomes of $1 million or more, 6 percent of large C corporations with total assets of at least $10 million, and 0.1 percent of partnerships and S corporations. Compare this with audit rates of 8.4 percent, 16.6 percent and 0.4 percent in 2010 for these same groups of taxpayers.

The downward audit spiral correlates with drops in IRS funding and personnel. The Inflation Reduction Act gives the IRS $80 billion over 10 years to be used for enforcement and collection activities, operations support, modernizing business systems and improving taxpayer service.

Here’s what IRS officials say the agency will do with the enforcement money: Audit big corporations, pass-through entities, high-net-worth individuals, cross-border activities, virtual currency transactions and certain other schemes. Also, hire and train more revenue agents, tax specialists, collectors and IT pros, and invest more in data analytics and other technology for selecting returns for audit.

Increased audits won’t happen overnight. It will take the agency time to hire experienced examiners and to train them to audit complicated tax returns. Most of the enforcement effects won’t be felt by taxpayers for at least a couple of years. IRS officials vow that taxpayers making under $400,000 won’t see more audits. However, many people are skeptical that the IRS can make good on this promise.

(Joy Taylor is editor of The Kiplinger Tax Letter. For more on this and similar money topics, visit Kiplinger.com.)

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