IRS audits are about to surge - this is who the tax agency is targeting

The IRS will increase tax audits on the wealthiest Americans and large corporations as part of its effort to crack down on tax cheats. 

The agency received $80 billion in new funding as part of the Biden administration's landmark Inflation Reduction Act legislation. 

Now the IRS has outlined its plans to use the funding to increase audit rates for particular groups - as well as improving lagging customer service. 

Over the next three tax years, it aims to double the audit rate for the wealthiest Americans earning more than $10 million a year, and triple the audit rate on large corporations with assets of $250 million or more. 

Danny Werfel, IRS commissioner, reassured everyday Americans that the agency will not increase scrutiny of people who earn less than $400,000 a year - which covers the vast majority of US taxpayers.

The IRS has outlined its renewed plans to use the funding to increase audit rates for particular groups - as well as improving lagging customer service

As part of a 52-page document outlining its plans, the IRS also said large, complex partnerships with assets over $10 million will also be audited at a ten times higher rate.

While the majority of tax returns are accepted, some face closer inspection from the IRS in the form of an audit. This is to check whether income, expenses, credits and deductions have been reported correctly - and to help deter tax fraud. 

Werfel said that there is no plan for a new wave of audits coming for middle and low income households, during a conference call with reporters. 

'This update also reflects our ongoing effort to make sure we focus compliance resources where they need to be,' he added. 

The IRS closed nearly 583,000 tax return audits in the 2023 fiscal year, according to the agency's latest Databook.

This resulted in $31.9 billion in recommended additional tax.

Ultra-wealthy taxpayers with annual incomes exceeding $10 million are already the most likely to face scrutiny from the IRS, most recent data shows. 

But the second most likely group are those who claim a particular credit - who tend to be low and moderate-income taxpayers. 

Taxpayers who claim the Earned Income Tax Credit - a tax break for those earning below a certain threshold - are more than twice as likely as others to get audited, according to data from the 2020 tax year. 

'Audit rates of those receiving the EITC remain at high levels in recent years while rates dropped precipitously for those with higher income, partnerships and others with more complex tax situations,' the agency said in a statement in September last year. 

Taxpayers who claim the Earned Income Tax Credit - a tax break for those earning below a certain threshold - are more than twice as likely as others to get audited, IRS data shows

Danny Werfel, IRS commissioner, also reiterated that it will not boost scrutiny of people who earn less than $400,000 a year - which covers the vast majority of US taxpayers

The EITC is a tax break for low and moderate-income workers. In general, the less you earn, the larger the credit - and it also depends on tax filing status and the number of children people have. 

The reason EITC returns can get flagged is if IRS records show that the taxpayer does not qualify for all or some of the credit, CBS reported, such as claiming a child who is not actually eligible. This can happen if they are over 19, for example, or not a full-time student. 

About 8 in 10 audited returns that claimed the EITC had either incorrectly claimed a child or misreported income, according to a 2022 report from the National Taxpayer Advocate.

Alongside increased audits, the agency also outlined plans to improve its customer service after taxpayers complained of long call wait times and processing delays. 

For the tax season which just ended on April 15, the IRS said call wait times were cut down to three minutes, compared with the average 28 minutes in 2022. 

Bolstered efforts to pursue high income, high wealth individuals who have either not filed their taxes or failed to pay recognized tax debt has led to the collection of $520 million so far, it said.