The IRS is overhauling how it audits. Here’s who is a target

(NEXSTAR) – The IRS is changing things up. The tax agency said Thursday it will be “taking swift and aggressive action” to crack down on people and companies not paying taxes properly.

The IRS now has the funding to take a closer look thanks to an influx of cash from the Inflation Reduction Act, or IRA, the agency said. “Prior to IRA, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that non-compliant taxpayers use to shelter or manipulate their income to avoid taxes.”

The audit rate of millionaires fell by more than 70% from 2010 to 2019 and the rate on large corporations dropped by more than 50%. The IRS estimates there’s now a $683 billion tax gap made up of taxpayers underreporting income, underpaying what they owe, or not filing at all.

As it audits more taxpayers, the IRS says there are some groups it will be targeting more:

• Wealthy individuals whose income tops $10 million
• Companies with assets above $250 million
• Complex partnerships with assets more than $10 million
• Corporations and high-income taxpayers using business aircraft, like private jets, for personal use

People making under $400,000 and small businesses won’t be subject to more audits as a result of the changes, IRS Commissioner Daniel Werfel said.

The IRS says it also wants to take the focus off Black, low-income taxpayers, who have disproportionately been the target of audits. A study from January 2023 involving university researchers and the Treasury Department found that IRS data-driven algorithms selected Black taxpayers for auditing at up to 4.7 times the rate of non-Black taxpayers.

The study also said the IRS disproportionately audited people who claim the Earned Income Tax Credit, which is aimed at low- to moderate-income workers and families: While Black taxpayers accounted for 21% of the claims for that break, they were the focus of 43% of the audits concerning the credit.

“We have taken swift initial action to dramatically reduce the number of those audits. We have also made changes to the selection criteria for those audits,” Werfel said.

The discriminatory audits, he told reporters, “degrade trust in our tax system.”

“We are overhauling compliance efforts to advance our commitment to fair, equitable, and effective tax administration and hold ourselves accountable to taxpayers we serve,”the IRS wrote in its annual update.

The IRS plans to refocus its audit targets by tax year 2026.

The Associated Press contributed to this report.