TIGTA Advises IRS of Continuing Improvements For Auditing High-Income Taxpayer (> $400,000 of Income)

On August 8, 2023 we posted IRS Releases Inflation Reduction Act 1-year report card Including Efforts To Pursues High-Income Individuals Tax Evaders where we discussed that the IRS is working to ensure high-income filers pay the taxes they owe. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is now taking swift and aggressive action to close this gap.

Now TIGTA has released its report stating that the IRS Needs to Leverage the Most Effective Training for Revenue Agents Examining High-Income Taxpayers.

In August 2022, The Secretary Of The Treasury Stated
That IRA Funding Was Intended In Part To Increase Examination Of High-Income Taxpayers.

The Secretary also directed that no additional resources, including any new hires, shall be used to increase the share of small businesses or households below the $400,000 threshold that are audited relative to historical levels. 

The Large Business and International (LB&I) Division has expertise in training revenue agents on examining high-income taxpayers. However, the IRS’s efforts to train new hires do not appear to be fully leveraging this expertise. The IRS treats this training as specialized and only offers it when necessary for employees auditing in this specialized area. Commensurate with the new IRA funding, the IRS should revise its training paradigm and expose new hires to the types of issues associated with high-income taxpayer returns. 

The Small Business/Self-Employed Division’s Fiscal
Year 2023 Examination Plan Showed No Significant Increase
In The Number Of High-Income Individual Audits.

Additionally, the LB&I Division’s resource allocation plan is not detailed enough for TIGTA to assess the IRS’s intended efforts to examine high-income individuals with the increased enforcement funding. 

The IRS does not have a unified or updated definition for individual high-income taxpayers. The Tax Reform Act of 1976 required annual publication of data on individual income tax returns reporting income of $200,000 or more. The current examination activity code schema still uses $200,000 as the main threshold. The IRS’s Inflation Reduction Act Strategic Operating Plan sets forth leveraging data analytics to improve the IRS’s understanding of the tax filings of high-wealth individuals and to address potential noncompliance. Consequently, the IRS needs to update its high-income taxpayer definition to better identify and track examination results and manage examination priorities. 

TIGTA made six recommendations, including that the IRS leverage the LB&I Division’s extensive knowledge base by embracing its current high-income individual training content and ensure that examination plans follow the Secretary of Treasury’s Directive to prioritize coverage of individual high-income earners over $400,000.

The IRS agreed or partially agreed with five of the six recommendations and disagreed with one recommendation. 

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