IRS to Increase Audits of Wealthy Taxpayers

Under pressure to audit taxpayers across all income classes more equally, the IRS has been directed by Treasury Secretary Steven Mnuchin to ramp up audits of the wealthier taxpayers. The move is in response to growing pressure on the agency after increasing audits of lower-income taxpayers and decreasing audits of high-income individuals.

In a May 2019 report, the IRS communicated that it audited fewer millionaires and large corporations in fiscal year 2018 than the previous year, which added to a multiyear decline. Part of the issue stemmed from substantial cuts in funding to the IRS, causing workforce reductions, including fewer top auditors who had the expertise to review complex returns characteristic of the wealthy. While the IRS has admitted it is less expensive and “easier” to audit lower-income taxpayers, the agency has been under fire for doing so.

Mnuchin’s request comes with proposed funding for fiscal 2021 for the increased number of audits. In a House Ways and Means Committee hearing in March, he told committee members, “I have specifically directed the IRS commissioner to come up with a plan to increase the amount of funding so that we can audit more high-income earners, so that is specifically in our plan.”

According to committee members, 30 percent of taxpayers at the high end of the income scale were audited 10 years ago, while only 7 percent were audited in 2018. This is in stark contrast to lower-income taxpayers, particularly those who claim the Earned Income Tax Credit (EITC) and account for 39 percent of all audits. The EITC subsidizes working families with low-to-moderate incomes. Correspondence audits, often used to look into those individuals claiming the EITC, cost $150 and take five hours per return. This compares with 61-251 hours per return to complete an audit of a taxpayer with an income of $10 million or more.

In addition to $12 billion in funding for the IRS for 2021, the budget calls for an additional $400 million in the form of a cap adjustment, to “fund new and continuing investments in expanding and improving the effectiveness and efficiency of the IRS’s tax enforcement program.”

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For more information on this topic, please contact James Pickett by calling 770.396.2200.