Title: IRS Faces Challenges in Compliance with Audit Rate Directive for Low-Earning Individuals
The IRS Struggles to Comply with Audit Rate Directive
According to a recent report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS has made limited progress in complying with a Treasury Department directive that prohibits targeting individuals earning less than $400,000 a year with higher audit rates. This directive was issued in response to the Inflation Reduction Act (IRA) that granted the IRS funding for enforcement activities. However, the IRS has faced challenges in developing a methodology to comply with the directive, leading to delays in implementing the required changes.
Historical Base Year Audit Rate Calculation
To comply with the directive, the IRS must establish a historical “base year” audit rate for taxpayers with incomes below $400,000. The IRS and the Treasury have selected tax year (TY) 2018 as the base year. However, as of May 2024, the agencies have not finalized the methodology to calculate the TY 2018 audit coverage rate for tax returns with total positive income (TPI) under $400,000. The report cites the exploration of alternative methodologies as the primary reason for the delay in calculating the audit rate.
Flexibility in Auditing Taxpayers
The IRS has chosen not to use the standard approach of determining audit rates based on income categories for taxpayers earning less than $400,000. Officials from the IRS explained that they want the flexibility to audit taxpayers who may intentionally underreport their income below the $400,000 threshold. This flexibility allows the IRS to target individuals who may be purposefully evading their tax obligations, thus ensuring fair and accurate enforcement.
Non-Urgent Matter and Timetable Concerns
The IRS does not consider compliance with the directive to be an urgent matter due to the belief that there is sufficient time to develop the required methodology. However, the report highlights the need for the IRS to expedite the finalization of its plan to comply with the Treasury Secretary’s directive, given the complexity of the task and the approaching fiscal year 2025.
IRS Commitment to Enforcement Efforts
In response to the draft report, the IRS deputy commissioner, Douglas W. O’Donnell, affirmed the agency’s commitment to administering the tax code in accordance with the Treasury directive. O’Donnell stated that the IRS has already taken steps to shift its tax compliance attention to high-income earners, partnerships, large corporations, and abusive promoters.
Assurances for Small Businesses and Low-Earning Households
The IRS has clarified its stance on audit rates for small businesses and households earning less than $400,000 per year. In both the agency’s response to the report and a statement from a media relations officer, it is confirmed that audit rates will not increase for this demographic relative to historical levels. This assurance provides relief to small business owners and low-earning households.
Ambiguity and Concerns Raised
Despite these assurances, concerns have been raised about the ambiguous nature of the directive and its potential impact on taxpayers. Senator Mike Crapo criticized the threshold of $400,000, stating that it applies to total positive income without accounting for losses. This could unfairly impact taxpayers who earn less than $400,000 after deducting expenses and losses. Additionally, the directive’s application to married couples raises concerns about a potential marriage penalty.
Fairness and Monitoring Progress
The recent TIGTA report also mentions the issue of married couples exceeding the $400,000 threshold for higher audit rates, even if each individual’s income is below this amount. The IRS states that the directive does not differentiate between married filing jointly and single households, and therefore, the threshold remains the same for all. This decision aims to simplify monitoring progress but may raise fairness concerns for married taxpayers.
Conclusion
The IRS’s compliance with the audit rate directive for individuals earning less than $400,000 a year has faced challenges in methodology development and timeline management. While the IRS remains committed to enforcing the tax code as directed, concerns about fairness and the potential impact on certain taxpayers persist. The agency’s efforts to shift focus towards high-income earners and abusive promoters demonstrate its commitment to effective enforcement. However, the IRS must prioritize the finalization of its compliance plan to ensure timely implementation of the directive and address the concerns raised.
