An audit launched by the Treasury Inspector General for Tax Administration found that the Internal Revenue Service has stopped implementing a 2020 Treasury Directive that requires the agency to audit a minimum of 8% of all individual returns with high incomes filed annually, meaning those individuals with income of $10 million or more. The purpose of the report was to better understand the impact on audit productivity that comes from focusing audit resources on taxpayers above certain high income thresholds.
Under TIGTA, the IRS complied with Treasury Directive 2020 for three tax years, but broke away to follow a broader Treasury Directive 2022 instead as part of the IRS' funding efforts of the Inflation Reduction Act. The directive directed the IRS to increase the audit rate of taxpayers with incomes above $400,000, citing previous audits as unproductive and yielding consistently high rates.
Audits of revenue of $10 million and above are most effective
However, the TIGTA report found that audits targeting high-net-worth individuals with incomes of $10 million or more were more productive than those targeting individuals with incomes over $400,000 but less than $10 million. For six tax years, between 2016 and 2021, the Small Business/Self-Employed Division assessed over $574 million, averaging about $124,389 per return and approximately $2,220 per hour for individual returns with positive total income of $10 million or more lot, compared to just an average of $31,000 in assessments for audits on revenues of more than $400,000 but less than $10 million over the same time. That's four times the estimated return dollars for the $10 million and up category.
The report also found that the Large Business and International Division case selection methods put in place before the 2020 Treasury Directive resulted in better productivity measures compared to results after the Treasury Directive. Before the 2020 directive and before the modifications to the selection methodology, examinations of returns of taxpayers earning $10 million or more were nearly six times more productive based on average dollars assessed per return. The LB&I division attributed the flat rate increase to workforce losses.
TIGTA recommendations
Based on their findings, TIGTA recommended that the IRS include a separate category for taxpayers with income of $10 million or more to ensure that the productivity of examinations on these high-income individual returns is tracked and benchmarked. with examinations of taxpayers at other income levels and identify possible causes for low productivity examination results of the LB&I Division and monitor measures to ensure that the most productive returns are selected for examination.
IRS response
The IRS partially agreed with the recommendations, stating that it already categorizes taxpayers by various income levels, including $10 million and above, and that it has taken steps to identify the causes of low productivity exams. However, she disagreed that it should compare specific income levels.
The IRS's response letter to the report also boasted some of its major accomplishments, such as recovering $520 million since January 2024 from taxpayers with more than $1 million in income who either did not file taxes or have avoided paying them. The response also referred to the IRS's recently updated Strategic Operations Plan, which includes plans for the agency to modernize its aging technology and use new enforcement staff to increase controls on HNW taxpayers, as long as Congress maintains Act funding levels.
These findings suggest that President Biden's push to increase audit rates (following the big increase in funding) for taxpayers earning over $400,000 may not be as effective as narrowing the $10 million and up bracket. The current President's campaign is promising increased auditing across the board for large corporations, partnerships and multimillionaires.