IRS still struggling to hire, train agents to go after wealthy taxpayers

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The IRS is still struggling to carry out President Biden’s orders to go after more high-income taxpayers, an inspector general said Tuesday, saying the tax agency is grappling just to keep up with attrition in its ranks, much less expand its audits.

Experienced revenue agents who are still on the job are being pulled from auditing duties to train new employees, sapping the agency of exactly the people it needs to boost audits of the complex tax returns filed by wealthier Americans, the Treasury Inspector General for Tax Administration said.

And the IRS hasn’t updated its definition of a high-income taxpayer in decades, leaving a mismatch between the $200,000 level set in 1976 and Mr. Biden’s goal of more audits for people making $400,000 or more.

Without fixing the mismatch, the IRS can’t hone its training and may not be able to judge whether the agency is meeting its goal of targeting high-income taxpayers, the inspector general said.

A lot is riding on getting it right.

Congress counted on the IRS massively boosting its audits of wealthy taxpayers to pay for Mr. Biden’s climate change plans in last year’s $740 billion Inflation Reduction Act. If the IRS is slow to ramp up the audits, the actual revenue may be skimpier than expected.

“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,” the inspector general said. “Consequently, the IRS needs to update its high-income taxpayer definition to better identify and track examination results and manage examination priorities.”

The audit comes a year after the law passed Congress, clearing without any GOP support.

Republicans warned of “super-charging” the IRS, saying it would make life unpleasant for millions more Americans.

Democrats countered that they want to go after wealthy Americans who aren’t paying what they owe.

To that end, Treasury Secretary Janet Yellen has ordered the IRS not to increase audits above “historical levels” for those making less than $400,000. But neither Ms. Yellen nor the IRS has said what that historical benchmark is.

The inspector general said it’s tough to tease out any hints from the IRS’s earliest plans for carrying out the law.

Both the Large Business and International Division, and the Small Business/Self Employed Division, are going to be involved in the effort.

But they are still losing staff.

Through the first half of fiscal year 2023, the SB/SE and LB&I divisions hired 34 new revenue agents but lost 302, for a net loss of 286 agents.

The inspector general also said neither division consistently trains new revenue employees on the tactics that high-income taxpayers use to evade paying what they owe.

“High-income taxpayers are frequently involved in complex entities and financial arrangements, which can increase the risk of tax avoidance and evasion of the tax laws,” the new report said. “The IRS needs to hire and train employees as soon as practical to achieve the congressional intent to increase examinations of high-income taxpayers using IRA enforcement funds.”

In its official response, the IRS repeated its commitment to the $400,000 income level for expanding audits of taxpayers and said it has plans for how to get there.

“IRS is investing in training existing and new employees, hiring across the Operating Divisions to rebuild our enforcement resources and implementing modern technology and data analytics to support the success of our efforts,” said Douglas E. O’Donnell, deputy commissioner for services and enforcement.

He said, though, that the agency doesn’t want to standardize training because it could mean wasting resources on employees who already bring a certain level of knowledge. He said training needs to be tailored, but acknowledged the IRS is still figuring that out.

The IRS refused a number of the inspector general’s suggestions for improvements.

In particular, the IRS said there is no reason to formally update the definition of a high-income taxpayer. Mr. O’Donnell said a “static” definition would hinder the agency’s “agility to address emerging issues and trends.”