With an additional $80 billion in funding over the next decade, the IRS is using the bulk of its funds to vet taxpayers earning more than $400,000 a year, focusing on high-net-worth individuals, corporations and partnerships.
That means heightened scrutiny for the highest earners, whose chances of being audited have fluctuated wildly over the past four years, including a precipitous 75% annual drop in 2020, the first year of the pandemic.
IRS Commissioner Daniel Wayfair said last month the agency would audit taxpayers with reported income of less than $400,000 At the same pace as in 2018when the returns were filed in 2017, the Trump administration undertook a massive overhaul of the tax code, lowering individual tax rates to historic lows starting in 2018.
Officials did not make a similar statement about using the given historical exchange rate for high earners. It suggests these taxpayers will bear the brunt of the new scrutiny.
Traditionally, U.S. taxmen audit federal returns at different rates depending on how much income is reported.It aims to reduce the so-called tax gap, or the difference between tax due and tax paidThe Treasury Department estimates that the shortfall created by tax evaders is approximately $600 billion per year, equivalent to $7 trillion in lost tax revenue over the next decade. Personal tax rates are set to rise in 2026, which may account for the disproportionate loss of tax revenue.
An additional $80 billion from the IRS, of which $45.6 billion will go to law enforcement, which is projected to boost federal revenue by more than $180 billion over the next decade, accounting for a fraction of the tax shortfall.The rest of the new money will be used to improve taxpayer services — such as having IRS agents physically answer the phone — operational support and modernize the agency’s outdated technology, some of which Going Back 60 Years to the Kennedy Administration.
Wild swings in audit rates for the rich
Overall audit rates have been declining for more than a decade. But in recent years, interest rates for high earners have changed significantly year by year.
In 2012, the IRS reviewed 136 out of every 1,000 taxpayers earn at least $10 millionor 13.6%, according to the agency’s latest data booklet.
By 2017, that share had fallen to 6.3 percent of those earning at least $10 million a year.
But the following year, the rate rose and fell 9.2 percent in 2018.
In 2019, the tax rate hits 10.2% for those earning at least $10 million.
Then, in 2020, it plummeted to 2.4%.
Changes in audit rates for those earning $500,000 but less than $1 million have also fluctuated over the years, but there has been no sharp decline for those earning more than $10 million.
When it announced its strategic plan for eight fiscal years through 2031, the agency noted that it now employs about 80,000 people — less than 20% decrease from 95,300 in 2010 – due to budget cuts. Meanwhile, the U.S. population, which includes taxpayers and tax-paying family members, grew 7 percent.
For the most part, the number of wealthy and very wealthy Americans has exploded, thanks in large part to the recent bull market. Number of U.S. households with net worth between $1 million and $5 million, excluding value of primary residence, from 2020 to 2021 alone, 8.1% increase to 11.6 million, according to Spectrem Group. The number of ultra-wealthy households with at least $25 million jumped 17.8% to 252,000 during that period.
Scott Bishop, executive director of wealth solutions at Avidian Wealth Management in Houston, said the institution faced a major hurdle in committing money: National accountant shortageespecially those who can scrutinize complex returns involving partnerships.
“So the real question is, are they going to find good people who understand what they’re doing?” asked Bishop, who is both a certified financial planner and a certified public accountant.
Still, two things seem possible, he said.
First, the agency would find it easy to root out people who owe taxes on digital payments.A law that went into effect this year requires cash apps and online marketplaces such as PayPal and eBay to send tax documents to millions of Americans If they receive $600 or more in a calendar year. The previous threshold was to earn $20,000 through at least 200 trades.The IRS is concerned about the rise of the gig economy and unreported payments by those who did not file W-2 employment payroll with the agency
Second, Bishop said, the IRS will likely focus on a prohibited tax avoidance practice known as listing transactions.the agency has a List of tax avoidance abuses These include joint conservation easements, employee stock option plans for private companies, accelerated deduction of contributions to 401(k) retirement plans, and abusive Roth IRA transactions. In the latter, the IRS is looking at transactions in which taxpayers donate property or shares of private companies to tax-exempt Roths for less than their fair market value, thereby avoiding paying taxes.
“They’re going to focus on things that aren’t even in the gray area anymore,” Bishop said.