The Internal Revenue Service (IRS) has announced its intentions to significantly increase audit rates for big corporations, partnerships, and multimillionaires over the next three years. This decision comes as the agency ramps up its enforcement spending and hiring to boost collections.
Targeted Audits
The IRS plans to triple the audit rate on corporations with assets over $250 million to 22.6% in the 2026 tax year, up from 8.8% in 2019. Similarly, for complex partnerships with assets over $10 million, the audit rates are expected to increase by nearly 10-fold to 1% in tax year 2026 from 0.1% in 2019. Individuals with total positive annual income of over $10 million will also face a 50% increase in audit rates to 16.5% in the 2026 tax year.
Exclusion of Small Businesses
Despite these increases, the IRS has made it clear that audit rates for individuals and small businesses earning under $400,000 will not be raised. This decision aligns with President Joe Biden’s commitment not to increase taxes on this population.
The IRS intends to spend $7.25 billion of the Inflation Reduction Act funds in fiscal 2024, a significant increase from the $3.4 billion spent in fiscal 2023. The agency’s strategic operating plan outlines further spending increases in the following years, reaching a total of $57.82 billion over the decade through fiscal 2031.
IRS Commissioner Danny Werfel emphasized the importance of these changes in a statement, highlighting the contrast to years of under-funding that led to deteriorated taxpayer service and tax enforcement. The funding from the Inflation Reduction Act aims to modernize the IRS’s systems, enhance taxpayer services, and close the “tax gap” estimated at $7 trillion over 10 years.
The funding for the IRS has not been without political controversy. Democrats passed the Inflation Reduction Act to make up for a decade of budget cuts to the IRS by Republican-led Congresses. Republicans, on the other hand, have criticized the IRS spending as harassment of Americans over their taxes and have managed to reduce the funding through top-line spending deals.
To support its increased enforcement efforts, the IRS has hired thousands of new staff using funds from the Inflation Reduction Act. The agency plans to further increase its workforce in the coming years, although it may fall short of Werfel’s goal of over 100,000 IRS employees within the next three years.
The IRS’s plans to increase audits on big corporations and multimillionaires represent a significant shift in enforcement strategy. The agency’s focus on closing the tax gap and improving taxpayer services is commendable, but the political controversies surrounding the funding and hiring goals highlight the challenges ahead for the IRS. It remains to be seen how these changes will impact tax collection and enforcement in the years to come.