Inspector general backs Trump over Biden in taxpayer audit standards

The IRS’ inspector general is out with a new report finding that the tax agency gets more bang for its buck by going after the wealthiest taxpayers — a finding that undercuts President Biden’s approach to expanding audits.

Mr. Biden tossed out Trump-era guidance that told the IRS to focus particularly on taxpayers with incomes of $10 million or more. Mr. Biden said he wanted to see more audits on folks starting at the $400,000 income level.

The inspector general, though, said the IRS gets a much better return when it focuses on the wealthier taxpayers.

“However, we found that examinations of returns with more than $10M in income done by certain IRS functions are more productive than those between $400K and $10M,” the inspector general said in a statement accompanying the report.

Judged by the per-hour work, the IRS gets a $2,200 return for taxpayers at $10 million and above. That’s double the per-hour return for those in the $400,000 to $10 million range.

Things are even more tilted when viewed per examination. The higher-dollar returns resulted in yields four times higher than the lower-dollar examinations, the inspector general said.

“Our analysis of the average dollars assessed per return and per hour at the various [total positive income] ranges shows that the SB/SE Division examinations of returns with TPI of $10 million or more are more productive than returns with the lower TPI ranges,” the inspector general said. “SB/SE management stated that this is because returns with TPI of $10 million or more tend to have larger issue adjustments and therefore higher recommended tax amounts.”

SB/SE is the Small Business/Self Employed division of the IRS, which does most of the audits of the high-dollar returns in question.

The new report comes as the Biden administration makes plans for how it wants to spend tens of billions of dollars that have been pumped into the IRS under Democrats’ 2022 budget-climate law.

The IRS infusion was supposed to pay off with a large return on investment in better tax compliance — and it also serves as part of Mr. Biden’s messaging that wealthy taxpayers need to be forced to pay up.

Part of that is a debate over who qualifies as wealthy enough to deserve scrutiny, and it touches on a broader debate over targeted enforcement, with higher payoffs, versus random enforcement, which can deliver better overall compliance with the law.

That same equation plays out not just in IRS audits but criminal law and immigration enforcement — an area where the Biden administration adopts a more targeted approach.

The Trump administration in early 2020 set a $10 million framework and asked the IRS to audit 8% of taxpayers at that level of gross adjusted income.

The inspector general said the IRS met that goal in 2018, 2019 and 2020.

By 2021, audits of taxpayers with incomes of $10 million were down, with preliminary figures showing it below 3% as of last fall.

The Biden administration eventually canceled the $10 million directive, calling it obsolete. The administration said its new threshold for deciding audits would be much lower, at $400,000.

Lia Colbert, the IRS’ commissioner at the SB/SE division, said in the agency’s official response to the audit that the $10 million taxpayers are still part of the target for higher audits since they make more than $400,000.

“Accordingly, the IRS is focusing on high income, high wealth (HIHW) taxpayers, including those reporting $10 million or more, to ensure this population of taxpayers pays what they owe,” she said.

Ms. Colbert rejected the inspector general’s specific recommendations, though she said the IRS agrees with the goals and intends to reach them in its own way.

She said the Biden refocus is already paying off with more than half a billion dollars recovered by January from taxpayers with $1 million incomes who had outstanding debts or failed to file. She also pointed to work on going after complex partnerships, and a hiring spree that added more revenue agents.