Progress Limited in Methodology to Keep Audit Rates Stable for Those Making Less Than $400k

The Internal Revenue Service has made limited progress in developing a methodology that would help the agency meet the directive not to increase audit rates for those making less than $400,000 per year, the Treasury Inspector General for Tax Administration reported.

In an August 26, 2024, report, TIGTA stated that while the IRS has stated it will use 2018 as the base year to compare audit rates against, the agency “has yet to calculate the audit coverage for Tax Year 2018 because it has not finalized its methodology for the audit coverage calculation.”

The Treasury Department watchdog added that while the agency “routinely calculates audit coverage rates, the IRS and the Treasury Department have been exploring a range of options to develop a different methodology for purposes of determining compliance with the Directive” to not increase audit rates for those making less than $400,000, which was announced in a memorandum issued in August 2022.

The Directive followed the passage of the Inflation Reduction Act, which provided supplemental funding to the IRS that, in part, would be used for compliance activities primarily targeted toward high wealth individuals and corporations. Of the now nearly $60 billion in supplemental funding, $24 billion will be directed towards compliance activities.

TIGTA reported that the IRS initially proposed to exclude certain types of examinations from the coverage rate as well “waive” audits from the calculation when it was determined that there was an intentional exclusion of income so that the taxpayer to not exceed the $400,000 threshold.

The watchdog reported that it had expressed concerns that the waiver criteria “had not been clearly articulated and that such a broad authority may erode trust in the IRS’s compliance with the Directive.”

It was also reported that the IRS is not currently considering the impact of the marriage penalty as part of determining the audit rates of those making less than $400,000.

“When asked if this would be unfair to those married taxpayers, the IRS stated that the 2022 Treasury Directive made no distinction between married filing jointly and single households, so neither will the IRS,” TIGTA reported.

By Gregory Twachtman, Washington News Editor