The IRS Is Beefing Up! What Does This Mean for Audits and Collections?

Recent legislation that sought to alleviate growing inflation concerns has given the government one of the most effective tools for tax enforcement: a confident Internal Revenue Service (IRS). Consequently, Congress looks to make the 2024 tax year the most lucrative in American history, and the IRS coffers are filled with enough funding to hunt down every asset and dollar.

Your clients will experience an elevated audit risk this year. The tightening of collections enforcement and more personnel than ever for auditing means taxpayers in all brackets should be concerned. To protect their interests, here’s what you need to understand and how you can help advise them.

We’re finally seeing an uptick in more aggressive notices, cases moving through the IRS processes more quickly, and cases getting assigned to IRS Appeals (faster) and Revenue Officers is a more common occurrence.

Record Taxes Collected as IRS Receives Influx of Funds 

After a much-needed budgetary infusion from the Inflation Reduction Act, the IRS can make haste returning to pre-2010 audit rates and instituting more stringent collections enforcement. Taxpayers in all brackets will be targeted as the federal government collects record taxes—more than $4.4 trillion for fiscal year 2022, up from $4 trillion the year prior, the U.S. Department of Treasury reports. The non-profit Tax Foundation explains that tax collections across the board have increased as follows:

  • Individual income taxes: 32 percent
  • Corporate taxes: 17 percent
  • Payroll taxes: 14 percent

With an extra $78 billion over the next ten years, the IRS will strive to hire tens of thousands of IT technicians, support staff, and experienced auditors tasked with quashing corporate and high-income tax evaders. While IRS Commissioner Charles Rettig insists that funding will “absolutely not” be focused on increasing “audit scrutiny on small businesses or middle-income Americans,” concerns are growing.

Inflation Reduction Act Tax Implications: How Efforts to Curb Inflation Might Affect Taxpayers

In addition to giving the IRS a significant funding boost, the Inflation Reduction Act makes a clear effort to keep businesses from dodging corporate taxes. This takes the form of a 15 percent corporate minimum tax rate, which applies to multinational corporations with annual profits exceeding $890 million. Specifically, this rate will involve corporations’ publicly-available “book profits,” often higher than those reported to the government. If the total paid tax rate fails to reach 15 percent, businesses will be forced to pay extra until their effective worldwide rate reaches that benchmark. Although there are a few exceptions, this new rule should prevent large corporations from avoiding major tax payments.

The new corporate minimum tax may have a limited impact on everyday taxpayers, but the implications of funding increases could be far-reaching. While enhanced IRS support services may mean taxpayers won’t have to endure an arduous struggle to contact the agency, there is no guarantee that current wait times will decrease. One area the immense inflow of resources will affect is audits.

An Influx of Funds for IRS Auditing: What to Expect for Future Audit Rates

The current trend is for audit rates to increase swiftly as taxpayers earn more. A recent IRS statement suggests that a major jump has already occurred for those earning over an annual $10 million. The new audit rate for this income bracket is now over eight percent, as higher-income taxpayers saw the sharpest declines in audit rates prior to 2022. According to the Treasury Inspector General for Tax Administration, audit rates dropped by 75 percent between 2015 and 2019 for taxpayers earning over $1 million per year.

The U.S. Government Accountability Office (GAO) states that since 2010, audit rates have decreased the most for taxpayers with incomes of $200,000 and above. Given that audits on higher-income individuals require more staff and support, the typically automated lower-income audits remained the same. Yet, higher-income taxpayers are worried as the emboldened IRS looks to conduct the largest number of audits in over a decade. The current audit rate—0.25 percent per GAO reports—may likely increase beyond one percent, above pre-2010 levels.

The Need for Proactive Measures in the Face of Renewed IRS Scrutiny 

With IRS collection activity on the rise, it’s more important than ever to take a proactive approach to tax debt. While “ordinary” taxpayers once felt some semblance of security in assuming that the agency would mainly go after high-income earners, aggressive collection action is always possible. For example, taxpayers with overseas assets are shocked to discover that these resources are just as vulnerable as those kept stateside. A recent memorandum from the IRS Office of Chief Counsel confirms that the agency is authorized to share your tax details with various federal agencies and foreign governments, not to mention third parties such as banks or employers.

Although foreign assets and overseas holdings may only affect a few, taxpayers in all brackets need to become more conscious. The government has renewed confidence in its mission to ensure not a single income is underreported.

With IRS collections enforcement and audit rates rising, it’s never too early to be prepared. In the event you or your client are unable to resolve your issue with the IRS don’t hesitate to reach out to us directly at 720-398-6088.