IRS vows ‘equity’ in new approach to audits

The IRS says it will pursue “equity” in its decisions on whom to audit, vowing to pay special attention to the wealthiest Americans while working to reduce scrutiny on the working poor.

Commissioner Danny Werfel said the agency is making “sweeping, historic” changes to make sure the wealthy start to face more scrutiny over unpaid taxes, while also maintaining “a deep respect for taxpayer rights.”

The tax agency also said it will use artificial intelligence to help select the targets for at least some audits, while promising to do more to help taxpayers stung by fraud.

“The IRS is on the side of taxpayers, and we will be working to protect hard-working people from scammers or fraudsters who try to use the tax system for their schemes, whether it’s promising people inflated [Earned Income Tax Credit] amounts or tricking people into tax-related identity theft,” Mr. Werfel said.

The changes come a year after President Biden signed the Inflation Reduction Act, a massive budget bill that injected hundreds of billions of dollars into the administration’s climate change plans. To pay for part of the bill, Congress pumped $80 billion into the IRS, figuring it would use the money to increase audits, which would end up producing even more revenue for Uncle Sam.

Critics warned that the cash infusion would supercharge the IRS and subject Americans to ever more intrusive examinations of their finances.

Mr. Werfel on Friday reiterated his promise to chiefly focus on the wealthy, and added a new wrinkle: Working to tamp down on the high rate of audits for the Earned Income Tax Credit, which is claimed by the working poor.

The IRS said the EITC has seen “high levels” of audits, even as audit rates for high-income filers have dropped. A recent study found that Black taxpayers who claim the EITC are particularly likely to face audits, so lowering that rate would fit with the administration’s equity push.

Mr. Werfel didn’t say how the agency will cut into EITC audits, instead promising more details later this fall.

The IRS had far more details about how it will go after the wealthy.

The agency said it will pay particular attention to taxpayers who file as large partnerships, which are organizations that have assets of at least $100 million and at least 100 partners.

They are notoriously complex and difficult to audit, and the IRS has not really bothered to do so in recent years, according to a recent report by the Government Accountability Office. GAO said use of large partnerships has ballooned, but the IRS audited just 54 of them in 2019 — a rate of 0.3%.

The IRS also said it would assign dozens of examiners to scrutinize taxpayers who showed incomes of at least $1 million, and who also had an acknowledged tax debt of at least $250,000. The agency said it already knows of 1,600 taxpayers who fall into that category, and who owe hundreds of millions of dollars in combined debt.

And the IRS said it is now using artificial intelligence to help sniff out tax cheating and try to spot emerging scams.

The IRS again promised to abide by Mr. Biden’s promise that taxpayers with incomes less than $400,000 do not see an increased audit rate. But the agency still hasn’t said what that means in practice.

According to the latest data from GAO, the IRS audited those making between $50,000 and $100,000 at a rate of about 1 per 1,000 returns in 2019. That was down from about 7 per 1,000 returns in 2010.

Those at the lowest incomes, with below $25,000, saw their rates drop from 10 per 1,000 to 4 per 1,000. Their rate was higher primarily due to the EITC, which is rife with fraud and mistakes.

At the upper levels, those making $10 million or more saw their audit rate fall from 212 per 1,000 in 2010 to just 39 per 1,000 in 2019 — still higher than any other income level, but a massive decline nonetheless.

Democrats said the new IRS priorities announced Friday should fix that.

“For too long, the wealthy and well-connected have played by their own set of rules when it came to paying their taxes, leaving America’s working families to pay the price,” said Rep. Richard Neal, Massachusetts Democrat and a key architect of last year’s law.