The IRS says it is poised to step up audits as part of its fight against tax fraud and seeks to pump more revenue into the U.S. Treasury’s coffers. But not all taxpayer groups will face greater scrutiny, according to IRS Commissioner Danny Werfel.
The IRS was bolstered by $80 billion in new funding led by the Inflation Reduction Act (IRA), which was signed into law in 2022 by President Joe Biden. The idea behind the new funding was to help revive an agency whose ranks had been depleted over the years, leading to customer service grumbles, processing delays and lower audit rates.
On Thursday, the IRS outlined its funding plans, as well as its efforts so far to improve the agency’s customer service operations after some taxpayers encountered months-long delays during the pandemic. The IRA money helped the IRS respond to more calls from taxpayers during the tax season that just ended April 15, as well as strengthen its enforcement, leading to the collected $520 million from wealthy taxpayers who had not filed their taxes or who still had not filed their taxes. he owed money, he said.
“The changes described in this report stand in stark contrast to years of underfunding” that led to a deterioration of the agency’s services, Werfel said in a conference call with reporters.
Werfel noted that the IRS’s strategic plan for the next three fiscal years calls for a sharp increase in audits, although the agency reiterated that it will not step up enforcement for people who earn less than $400,000. per year, which covers the majority of American taxpayers.
Here’s who will face an increase in audits
At the same time, the IRS is ramping up its audit efforts, with Werfel noting Thursday that the agency will focus on high-net-worth individuals and large businesses:
- The IRS plans to triple audit rates for large businesses with assets exceeding $250 million. Audit rates for these companies will increase to 22.6% in fiscal year 2026 from 8.8% in 2019.
- Large partnerships with assets over $10 million will see their audit rates increase 10-fold to 1% in tax year 2026, up from 0.1% in 2019.
- High-net-worth individuals with positive total income above $10 million will see their audit rate increase by 50% to 16.5%, up from 11% in 2019.
“There is no new wave of audits coming from middle- and low-income individuals, coming from parents and parents. That’s not in our plans,” Werfel said.
But by focusing on large businesses, complex partnerships and wealthy individuals who earn more than $10 million a year, the IRS wants to send a signal, he noted.
“It sets an important tone and message to complex filers, to very wealthy filers, that this is our focus area,” he said.
The myth of the 87,000 armed IRS agents
The agency also highlighted its efforts to bolster hiring, thanks to new IRA money. In the mid-1990s, the IRS employed more than 100,000 people, but its workforce had fallen to about 73,000 workers in 2019 due to a wave of retirements and previous budget cuts.
Werfel said the agency recently increased its workforce to about 90,000 full-time equivalent employees and plans to expand to about 102,500 workers over the next few years.
“This figure will not even be a record for IRS staff; it is well below the numbers from the 1980s and early 1990s,” Werfel noted.
He added that the hiring data should dispel what he called “any lingering myths about a bloated IRS.” After the passage of the IRA, some Republican legislators warned in 2022 that the agency would use the money to hire “87,000 new IRS agents to audit Walmart shoppers.”
“This should dispel any misconception that we are hiring 87,000 officers,” Werfel noted, adding that many of the new hires are replacing retiring employees.
