The Internal Revenue Service has made little progress ensuring that Inflation Reduction Act funds are not being used to increase the audit rate for taxpayers with incomes below $400,000, according to a
In August 2022, the Secretary of the Treasury, Janet Yellen, directed the IRS to not use any additional resources to increase the percentage of audits on small businesses or households earning less than $400,000. Per the directive, the IRS and Treasury Department were to establish a base year on which to compare future compliance. The Treasury Inspector General for Tax Administration found they chose tax year 2018 as the base year, but the IRS has yet to calculate the audit coverage for 2018 because it hasn’t finalized its methodology for the audit coverage calculation.
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The IRS regularly calculates audit coverage rates, but in compliance with this directive it initially proposed excluding certain types of examinations when determining the audit coverage rate and an authority to “waive” certain other examinations from the calculation if taxpayers appeared to have intentionally understated income to avoid the $400,000 threshold.
TIGTA expressed concern that the waiver criteria were not clearly defined and that granting such a broad authority may diminish trust in the IRS’s compliance with the directive. The IRS abandoned the proposal of exclusions and waiver authority in May.
TIGTA made four recommendations. The IRS agreed to reach an agreement with the Treasury Department and document the methodology’s development. The IRS disagreed on using Return Transaction File data to count filing data on the threshold and instead will rely on Statistics of Income sampling data. After verifying the data field identified by TIGTA, the IRS agreed to establish procedures and controls to update total positive income.
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