The Internal Revenue Service is breaking out its audit stamp in a major effort to crack down on tax cheats.
The IRS recently released an update on its Strategic Operating Plan, which outlines major projects and outcomes the agency expects to deliver over the next 12 to 18 months with Inflation Reduction Act (IRA) funding.
"The changes outlined in this report are a stark contrast to the years of under-funding that deteriorated taxpayer service and tax enforcement, frustrating taxpayers, the tax community and IRS employees alike," IRS Commissioner Danny Werfel said in a statement.
As part of the IRA, the government directed an additional $80 billion to the IRS, much of which is dedicated to closing the tax gap by specifically enforcing tax compliance by the wealthiest tax evaders.
The IRS estimates that the tax gap, which is the difference between the amount of tax revenue the government is collecting and what taxpayers actually owe, is $683 billion -- and that approximately $77 billion (roughly 12% of the total tax gap) is due to non-filers. The agency says prior to the IRA, more than a decade of budget cuts prevented it from keeping pace with tax cheats.
"The IRS is now taking swift and aggressive action to improve tax compliance in areas where the agency did not have adequate resources prior to IRA funding," the agency said.
The IRS's new efforts are focused on high-income taxpayers who have failed to file federal income tax returns in more than 125,000 instances since 2017.
According to the update, "enforcement activities" include collecting taxes owed, conducting criminal investigations, reporting violations of internal revenue laws and other financial crimes, and providing digital asset monitoring.
The plan also notes that the IRS anticipates increasing audits on the wealthiest taxpayers, large corporations and large, complex partnerships by sizable percentages for tax year 2026. New enforcement staff will allow the IRS to double audit rates on the wealthiest taxpayers, reversing the sharp decline in audit rates over the 2010s.
More specifically, the IRS will:
• Nearly triple audit rates on large corporations with assets over $250 million, from 8.8% in tax year 2019 to 22.6% in tax year 2026
• Increase audit rates by nearly ten-fold on large, complex partnerships with assets over $10 million, going from 0.1% in 2019 to 1% in tax year 2026.
• Increase audit rates by more than 50% on wealthy individual taxpayers with total positive income over $10 million, with audit rates going from an 11% coverage rate in 2019 to 16.5% in tax year 2026.
"Our swift, thorough enforcement actions for those who willfully evade taxes will serve as an incentive for all taxpayers to comply with the nation's tax laws, as well as ensure our system is fair," the agency said.
The IRS emphasized that it will not increase audit rates for small businesses and taxpayers making under $400,000, adding that those rates remain at historically low levels. In fact, the IRS anticipates most taxpayers will actually see a lower likelihood of audit due to improved technology and customer service.
The enforcement initiative, which is already underway, has so far recovered $520 million as of January 2024. Using artificial intelligence and advanced analytics to help select complex partnerships for audits, the IRS opened audits of 76 of the largest partnerships in the U.S. that represent a cross-section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries.