IRS Strategic Plan: Increased Audits on Wealthy Taxpayers, Corporations, and Partnerships

The Internal Revenue Service (IRS) is making a significant shift in its approach to tax audits, focusing more intensively on high-income earners, large corporations, and complex partnerships. This new direction is outlined in the IRS’s updated Strategic Operating Plan and reflects the enhanced funding provided by the Inflation Reduction Act (IRA). The goal is to ensure that all taxpayers, particularly those with significant financial assets or complex financial structures, meet their tax obligations fully and fairly.

Strategic Focus: Wealth and Large Corporations

The updated Strategic Operating Plan highlights an ambitious plan to increase audit rates significantly for the wealthiest taxpayers and large entities. Key targets for these audits include:

• Large Corporations: The IRS plans to nearly triple the audit rate for corporations with assets exceeding $250 million. This rate will rise from 8.8% in tax year 2019 to 22.6% by tax year 2026. This substantial increase is designed to scrutinize the tax practices of large corporations more rigorously, ensuring compliance and addressing potential tax avoidance strategies that may have previously gone unchecked.
• Large, Complex Partnerships: The audit rate for large, complex partnerships with assets over $10 million will see a dramatic increase, from just 0.1% in 2019 to 1% in 2026. These partnerships often involve intricate financial arrangements and multiple stakeholders, making them a prime focus for enhanced scrutiny.
• Wealthy Individual Taxpayers: The IRS will also increase audit rates for individuals with total positive income exceeding $10 million. The audit coverage for this group is set to rise from 11% in 2019 to 16.5% in 2026. This heightened focus aims to address discrepancies and ensure that high-income individuals are complying with their tax obligations.

Why the Shift?

This strategic shift aligns with the IRS’s broader goals of narrowing the tax gap and ensuring fair enforcement across all income levels. By targeting higher-risk areas, the IRS intends to:

• Close the Tax Gap: Focusing on high-income and complex cases helps address the disparity between taxes owed and taxes collected. This effort is crucial in recovering unpaid taxes and reducing the overall tax gap.
• Enhance Compliance: By increasing scrutiny on wealthier taxpayers and large entities, the IRS aims to deter tax evasion and ensure that all taxpayers adhere to the law.
• Maintain System Integrity: Ensuring that all segments of the tax system are monitored and enforced fairly helps maintain the integrity and effectiveness of the tax administration system.

What This Means for Taxpayers

For high-income earners, large corporations, and complex partnerships, this increased audit focus means more rigorous examination of tax returns and financial practices. To prepare for potential audits:

• Ensure Thorough Records: Maintain accurate and comprehensive financial records to support your tax filings. This documentation will be critical in demonstrating compliance and addressing any inquiries from the IRS.
• Stay Updated on Tax Laws: Keep abreast of changes in tax regulations and ensure that your financial practices align with current laws and guidelines.
• Consult Experts: Engaging with tax professionals or legal experts can help navigate the complexities of tax compliance and address any potential issues proactively.

Challenges and Future Outlook

Despite the IRS’s progress, challenges remain. Commissioner Danny Werfel has acknowledged the need for ongoing transformation within the agency. Years of under-funding have created significant obstacles, even with the increased investment from the IRA.

To address these challenges, the Administration’s fiscal year 2025 budget proposal includes extending IRA funding through 2034. This proposal mandates a $104 billion investment over the next decade, projected to generate an additional $341 billion in revenue. This funding is essential for supporting the IRS’s transformation efforts, enhancing taxpayer services, and modernizing technology.

For more detailed information, you can access the full 52-page report here.

Learn More About Milikowsky Tax Law

At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.

Interested in learning more? Read on to learn how to respond to an IRS audit.