IRS to Use Bulk of $80 Billion in New Funding to
Scrutinize Taxpayers That Make Over $400,000

Armed with an extra $80 billion in funding for the next decade, the Internal Revenue Service is using the bulk of it to scrutinize taxpayers who make more than $400,000 a year, focusing on high net worth individuals, corporations and partnerships.  IRS Commissioner Daniel Werfel said he will commit to not increasing tax audits on businesses and households making less than $400,000 per year.

The IRS is looking to reduce what’s known as the tax gap, or the difference between taxes due and taxes paid. The Treasury Department estimates the shortfall, which is fueled by tax evaders, at around $600 billion annually, the equivalent of $7 trillion of lost tax revenue over the next decade.

The IRS’s additional $80 billion, of which $45.6 billion will go to enforcement, is expected to  increase federal revenue by more than $180 billion in the coming decade, a smaller slice of the tax gap. The rest of the new funding will go to improve taxpayer services — such as having an IRS staffer actually pick up the phone — operations support and modernization of the agency’s antiquated technology, some of which dates back 60 years to the Kennedy administration.

Overall audit rates have been declining for more than a decade. But in recent years, there have been stark year-to-year shifts in rates for higher earners.  In 2012, the IRS scrutinized 136 of every 1,000 taxpayers making at least $10 million, or 13.6% according to the agency’s most recent data book.  By 2017, the rate had plunged to 6.3% of those making at least $10 million.  But the next year, the rate increased, with 9.2% falling under the microscope in 2018.  By 2019, the rate for those making at least $10 million went to 10.2%. Then, in 2020, it plummeted to 2.4%.

The IRS is likely to focus on banned tax dodges known as listed transactions. The agency has a laundry list of abusive tax shelters that include syndicated conservation easements, employee stock option plans in private companies, accelerated deductions for contributions to 401(k) retirement plans and abusive Roth IRA transactions. In the latter, the IRS is looking at transactions in which a taxpayer contributes property or shares in a private company to a tax-free Roth for less than their fair market value, avoiding tax bills.

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