IRS plans to increase audits of the rich

The IRS recently released its new strategic plan. With its new $80 billion in new funding, the IRS plans to increase audits of the wealthy and large corporations.

The IRS has estimated that individual taxpayers underreported their income tax liability by an average of $245 billion yearly for tax years 2011 to 2013.

Since 2011, the number of auditors who work on simple audits has decreased by 18%, but those who work on complex audits have decreased by over 40%.

Individual returns were audited over three times more for tax year 2010 than for tax year 2019. Audit rates for people with incomes between $200,000 and $500,000 had the biggest decline, which was a 92% decrease. For people with income of $10 million or more, the audit rate dropped from 21.2% in 2010 to just 3.9% in 2019 (an 81% drop).

The IRS had been impacted by a decade of budget cuts, which caused audit and enforcement rates to plummet. The audit decline is good news for the tax cheats but bad news for the rest of us who pay our taxes.

A person making $20,000 is more likely to be audited than someone making $400,000. Some of the richest individuals in the country, such as Jeff Bezos, have had years in which they paid no federal income tax. People are likelier to be honest when filing their taxes if they think they might be audited.

The new plan, which was released by recently confirmed IRS Commissioner Daniel Werfel, is consistent with President Biden’s statement in his recent State of the Union address: “I think a lot of you at home agree with me that our present tax system is simply unfair,” Biden said. He has a proposal for his billionaire minimum tax, which would have a 20% minimum tax on income, including unrealized capital gains, for people with a net worth of $100 million or more.

Sen. Ron Wyden, D-Ore chair of the Senate Finance Committee, approves of the IRS plan. “The bulk of this funding,” he noted in a statement, “will go toward building up the IRS’s capacity to root out cheating by sophisticated, wealthy individuals and companies with highly complex structures.”

The new plan also includes proposed changes intended to improve customer service and upgrade the IRS's outdated computer systems. Many of the IRS hardware and software systems are over 25 years old, which is very inefficient. The critical computer system used by the IRS was created in the 1960s, which is around the time they were planning to send astronauts to the moon.

David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. He is the author of six tax books and has shared tax advice on national TV. He is the founder and president of Your Tax Care. The company provides business and tax education, including David’s one-minute tax tip radio recordings at YourTaxCare.com. David can be reached at (865) 363-3019 or contacted by email at david@yourtaxcare.com.