IRS says number of audits about to surge. Here's who it is targeting.

Caution Sign – IRS Audit Ahead

The IRS says it is about to ramp up audits as it cracks down on tax cheats and seeks to deliver more revenue into the U.S. Treasury’s coffers. But not every group of taxpayers will face more scrutiny, according to IRS commissioner Danny Werfel.

The IRS has been bolstered by $80 billion in new funding directed by the Inflation Reduction Act (IRA), which was signed into law in 2022 by President Joe Biden. The idea behind the new funding was to help revive an agency whose ranks have been depleted over the years, leading to customer service snarls, processing delays and a falloff in audit rates.

On Thursday, the IRS outlined its plans for the funding, as well as its efforts so far to burnish the agency’s customer service operations after some taxpayers encountered months-long delays during the pandemic. The IRA money has helped the IRS answer more taxpayer calls during the tax season that just ended on April 15, as well as beef up its enforcement, which led to the collection of $520 million from wealthy taxpayers who hadn’t filed their taxes or still owed money, it said.

“The changes outlined in this report are a stark contrast to the years of underfunding” that led to a deterioration in the agency’s services, Werfel said on a conference call with reporters.

Werfel noted that the IRS’ strategic plan over the next three tax years include a sharp increase in audits, although the agency reiterated it won’t boost its enforcement for people who earn less than $400,000 annually — which covers the bulk of U.S. taxpayers.

Here’s who will face an increase in audits

At the same time, the IRS is increasing its audit efforts, with Werfel noting on Thursday that the agency will focus on wealthy individuals and large corporations:

• The IRS plans to triple the audit rates on large corporations with assets of more than $250 million. Audit rates for these companies will rise to 22.6% in tax year 2026 from  8.8% in 2019.
• Large partnerships with assets of more than $10 million will see their audit rates increase 10-fold, rising to 1% in tax year 2026 from 0.1% in 2019.
• Wealthy individuals with total positive income of more than $10 million will see their audit rates rise 50% to 16.5% from 11% in 2019.

“There is no new wave of audits coming from middle- and low-income [individuals], coming from mom and pops. That’s not in our plans,” Werfel said.

But by focusing on big corporations, complicated partnerships and wealthy people who earn over $10 million year, the IRS wants to send a signal, he noted.

“It sets an important tone and message for complex filers, high-wealth filers, that this is our focus area,” he said.

The myth of 87,000 armed IRS agents

The agency also outlined its efforts to bolster hiring, thanks to the new IRA money. In the mid-1990s, the IRS employed more than 100,000 people, but its workforce had dwindled to about 73,000 workers in 2019 due to a wave of retirements and prior funding cuts.

Werfel said the agency has recently boosted its workforce to about 90,000 full-time equivalent employees, and that it plans to expand to about 102,500 workers over the next few years.

“That number won’t even be a record high for the IRS workforce; it’s well below the numbers from the 1980s and early 1990s,” Werfel noted.

He added that the hiring data should dissolve what he called “any lingering myths about a supersized IRS.” After the IRA passed, some Republican lawmakers warned in 2022 that the agency would use the money to hire “87,000 new IRS agents to audit Walmart shoppers.”

“This should put to rest any misconception about us bringing on 87,000 agents,” Werfel noted, adding that many of the new hires are replacing retiring employees.