IRS Will Use 2018 Audit Rates for Taxpayers Making Less than $400K

IRS auditAn increased budget for the Internal Revenue Service (IRS) means better service to taxpayers and closer attention to the tax gap. The U.S. Treasury and the IRS recently weighed in on the issue.


The IRS has already made strides in improving service to taxpayers and is in the process of boosting its compliance division. For decades, lack of funding has limited the reach of the agency in pursuing the most complex, high-dollar tax offenders. That may be changing.


Despite strident opposition to providing adequate funding for the IRS, the Inflation Reduction Act was enacted in 2022, providing approximately $80 billion to the IRS over the next ten years. For high- and middle-level earners, the question is personal—am I more likely to be audited? The answer is “yes” and “no.”


Because the IRS was budget bootstrapped, it lacked the technology or the agency prowess to pursue the taxpayers at the center of the tax gap—high-wealth earners. The tax gap is the difference between the estimated amount of taxes owed in the U.S. and the actual taxes paid. Despite what many might believe, the U.S. relies on voluntary payment of taxes. From the latest figures for the period between 2014 and 2016, the average annual total tax gap was estimated at $496 billion.


With the funding and a new strategic plan, the IRS plans to address that tax gap partially through increased audit activity. The agency is hiring audit personnel experienced with large corporations and partnerships. These agents will also investigate high-wealth individuals who may have significant offshore tax holdings that have avoided IRS attention due to their complexity.


It is no secret that the IRS intends to pursue top earners who avoid their tax liabilities. The question has been raised concerning the definition of that audit group. In her August 2022 directive to then IRS Director Charles Rettig, Secretary Yellen clarified her auditing aims, noting:

“Specifically, I direct that any additional resources—including any new personnel or auditors that are hired—shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels. This means that, contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited.”


With regard to the number of audits of those who earn under $400,000, the agency has noted it will use rates from 2018 to set its annual percentage of taxpayers to be audited in that group. So who might expect increased audit activity from the IRS? No real surprises: Large companies and wealthy taxpayers can expect the most attention as the IRS reinvigorates its audit capabilities.


Contact us when you are challenged by a tax litigation or notified of an IRS civil audit

The tax group at Robert J. Fedor, Esq., LLC helps you respond strategically to questions about taxes, failure to file tax returns, or your FBAR report. We serve local and international clients from offices in Chicago and Cleveland. Call 800-579-0997 or reach out to us today.


Download Five Ways to Avoid a Tax Audit eBook