IRS Targets Wealthy Taxpayers, Addresses Racial Audit Disparities

The IRS has unveiled a new Strategic Operating Plan, shifting audit focus to wealthy individuals and large corporations while reducing audits on low-income Black taxpayers. The plan aims to address racial disparities and reduce the tax gap, made possible by $80 billion in additional funding over 10 years.

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IRS Targets Wealthy Taxpayers, Addresses Racial Audit Disparities

IRS Targets Wealthy Taxpayers, Addresses Racial Audit Disparities

The Internal Revenue Service (IRS) has unveiled an updated Strategic Operating Plan, outlining key objectives to enhance taxpayer services, enforcement, and technology. Central to the plan is a significant shift in audit focus, with the agency aiming to increase audits on wealthy individuals and large corporations while reducing audits on low-income Black taxpayers.

Why this matters: This shift in audit focus has significant implications for the fairness and equity of the tax system, as it acknowledges and addresses the racial disparities that have historically plagued the audit process. By targeting wealthy individuals and large corporations, the IRS can help reduce the tax gap and ensure that those who can afford to pay their fair share do so, ultimately benefiting the broader economy and society.

Under the new plan, audit rates for corporations with assets exceeding $250 million are set to nearly triple by 2026, reaching 22.6%. Complex partnerships will see a near tenfold increase in audit rates, rising to 1%. The wealthiest individual taxpayers, those with total positive income surpassing $10 million, will face a more than 50% increase in audit rates, reaching 16.5% in 2026. Meanwhile, small businesses and taxpayers earning less than $400,000 will not experience any increase in audit rates, which will remain at historically low levels.

The IRS's strategic plan also addresses racial disparities in audit rates, which have disproportionately affected low-income Black taxpayers. A 2023 study found that the agency's data-driven algorithms selected Black taxpayers for audits at a rate 4.7 times higher than non-Black taxpayers. In response, IRS Commissioner Danny Werfel stated, "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 acknowledged that the discriminatory audits "degrade trust in our tax system."

The IRS's increased enforcement efforts are made possible by the $80 billion in additional funding provided over 10 years through the Inflation Reduction Act. This funding aims to help the agency close the estimated $683 billion tax gap, the difference between what is owed and what is lost due to non-filers, underpayment, and people underreporting their income.

Commissioner Werfel emphasized the IRS's commitment to fairness and improvement, stating, "We have made fundamental changes that have improved taxpayer services, brought new fairness to compliance efforts and launched important changes to our technology. We are making a difference to taxpayers and the nation, and the improvements at the IRS are just beginning." He added, "The funding provided by the Inflation Reduction Act creates a unique opportunity to realize a future of tax administration that meets the evolving needs of taxpayers."

The IRS's strategic plan represents a significant shift in the agency's approach to tax enforcement, focusing on ensuring that wealthy individuals and large corporations pay their fair share while addressing the racial disparities that have plagued the audit system. As the IRS continues to implement these changes, the impact on taxpayers and the nation's tax gap will be closely watched.

Key Takeaways

  • IRS shifts audit focus to wealthy individuals and large corporations.
  • Audit rates for corporations with $250M+ assets to nearly triple by 2026.
  • Wealthiest individual taxpayers to face 50%+ increase in audit rates.
  • IRS addresses racial disparities, reducing audits on low-income Black taxpayers.
  • $80B in funding from Inflation Reduction Act enables increased enforcement efforts.