The Internal Revenue Service (IRS) is aiming at a specific group to reduce cheating and boost revenues to the federal government. Should you be worried?
The answer depends on two things. The first is your income and the second is whether or not you lie on your tax returns.
The Taxpayers In Question
In its Strategic Operating Plan, the IRS details how it will increase hiring and use of technology to clear backlogs and go after high income tax cheats.
That high-income threshold leaves most taxpayers in the clear, according to the IRS. The agency will focus on the top two percent of income earners – those making $400,000 annual income and higher.
In announcing the new plan, the IRS referred to it as a “transformational change for taxpayers.”
The shift to auditing more high-income individuals will be just that.
Inflation Reduction Act Funding Change
For years there has been a disproportionate emphasis on auditing middle and low-income people.
A Syracuse University study found that families with incomes under $25,000 were audited five times more than everyone else.
However, IRS Commissioner David Werfel says that is all changing thanks to $80 billion in funding from the Inflation Reduction Act (IRA).
“This new compliance push makes good on the promise of the Inflation Reduction Act to ensure the IRS holds our wealthiest filers accountable to pay the full amount of what they owe,” said Werfel. “The years of underfunding that predated the Inflation Reduction Act led to the lowest audit rate of wealthy filers in our history. I am committed to reversing this trend, making sure that new funding will mean more effective compliance efforts on the wealthy, while middle and low-income filers will continue to see no change in historically low pre-IRA audit rates for years to come.”
Return on Investment
With costs rising and funding flat for several years prior to the IRA, the IRS may have focused on harvesting low-hanging fruit. The expense of auditing middle and income earners is much cheaper than going after wealthy taxpayers. That is because high earners and high net worth people tend to have more complicated tax returns. However, there is a cost being paid for that strategy.
Reduced emphasis on audits of the wealthy has increased the “tax gap” to $688 billion as of 2021, according to the IRS. The tax gap is the difference between the tax owed and what was actually paid.
The IRS thinks a new focus on higher earners will reduce that gap. In addition, one working paper supports that thinking.
Audits of the top 10 percent of earners have the potential to return $12 for every $1 spent, according to data gathered by the National Bureau of Economic Research.
GOP Vilification of IRS
Efforts to boost IRS effectiveness and reign in high-income tax cheats have not been universally popular.
Republican lawmakers have repeatedly opposed funding increases for the IRS.
“As part of the House Republican Commitment to America, I promised we would vote to repeal the Democrats’ army of 87,000 IRS agents on our very first day in the majority,” said then-Speaker Kevin McCarthy in early January.
McCarthy was referring to a projected increase in IRS personnel. However, few of those new hires will be auditors. They will include customer service representatives, clerical workers, lawyers, and technicians.
Few (if any) Americans enjoy paying taxes. Therefore, they do not like the IRS. However, the agency brings in much of the money that pays the government’s bills.
Last month, the nonpartisan Congressional Budget Office (CBO) reported that defunding the IRS would increase the deficit by almost $24 billion.
Your Chances of Being Audited
No matter how much the IRS is funded, your chances of being audited are extremely low. NOLO, an online legal service puts the figure at 0.2 percent. In other words, about two in 500 taxpayers.
However, if you have a high income and/or high net worth your chances of being audited next year are going up. If you do not make over $400,000 a year, your audit risk will be the same as in previous years, according to the IRS.
So, what can you do to avoid audit problems?
The simple answer is – be honest. However, there are a couple more things that might also help, such as:
Double-check your figures before filing your tax return. Anybody can make a mistake. A quick review may save you a lot of trouble.
Claim all your deductions, but do not fudge the figures. Claiming an excessive amount of charitable deductions or business lunches, for instance, can trigger an audit.
Use the technology. The error rate for paper returns is 21 percent, according to TurboTax. However, only 0.5 percent of electronic returns produce a mistake.
File on time. Late filers get an extra look.
If you are a low-income taxpayer, be sure you are filing for the Earned Income Tax Credit properly. Many audits are triggered by efforts to defraud that program, according to the IRS.
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