IRS Shifts Audit Focus: What Tax Practitioners Need to Know
Recent changes in IRS audit strategies have significant implications for tax practitioners and their high-income clients. A new report from the Treasury Inspector General for Tax Administration reveals a notable shift in the IRS's approach to audits, moving away from a focus on ultra-high-income taxpayers to a broader range of high earners.
In 2020, the Treasury directed the IRS to audit at least 8% of tax returns with incomes of $10 million or more. This directive was followed for three years but was ultimately abandoned due to concerns about its productivity. The landscape changed dramatically with the passage of the Inflation Reduction Act (IRA) in 2022, which provided funding for increased scrutiny of high-income taxpayers.
Now, the IRS has lowered its audit threshold to those earning $400,000 or more, a significant drop from the previous $10 million mark. This shift aligns with the IRS' goals and a directive from Treasury Secretary Janet Yellen to avoid increasing audit rates for those earning less than $400,000.
The productivity of these audits has varied across IRS divisions. The Small Business/Self-Employed Division found that audits of returns with $10 million or more in income were generally more productive, yielding four times more dollars assessed per return and twice as much per hour compared to the $400,000-$10 million range. However, the Large Business and International Division saw better results with its pre-2020 case selection methods.
For tax practitioners, these changes necessitate a reevaluation of client risk and compliance strategies. Clients earning $400,000 or more now face a higher probability of audit, while those in the $10 million-plus bracket may see a reduced risk compared to recent years. This shift demands meticulous compliance efforts for all high-income clients, with particular attention to those in the newly targeted income range.
Proactive planning has become more critical than ever. Tax professionals should advise clients on potential audit risks based on their income levels and implement robust documentation practices. It's also important to stay informed about IRS targeting strategies for specific industries or business structures that may attract additional scrutiny.
The IRS's recent recovery of $520 million from high-income non-filers and those with tax debts underscores the agency's renewed focus on enforcement. This development highlights the need for practitioners to emphasize accurate reporting and thorough record-keeping to their clients.
As the tax enforcement landscape continues to evolve, ongoing education about IRS strategic plans and audit focus areas is essential for tax professionals. Understanding the nuances of productivity metrics used by different IRS divisions can provide valuable insights for client advisory services. Clear communication with clients about these changes and the increased importance of accurate reporting will be key to navigating the new audit landscape successfully.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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