The Internal Revenue Service (IRS) has announced plans to reduce its audit rate for low-income taxpayers while increasing scrutiny on wealthier individuals and corporate taxpayers. The move is part of a rebalancing effort aimed at improving tax administration and addressing racial disparities in audit selection.
In a letter to Senate Finance Committee chairman Ron Wyden, IRS Commissioner Daniel Werfel outlined the agency’s strategy for fiscal year 2024. Werfel stated that the IRS will significantly reduce the number of correspondence audits focused on refundable tax credits, such as the Earned Income Tax Credit (EITC), American Opportunity Tax Credit, Health Insurance Premium Tax Credit, and Additional Child Tax Credit. The goal is to decrease over-reliance on audits to resolve basic errors, ensuring that eligible taxpayers receive the credits and deductions they are entitled to.
Furthermore, the IRS aims to address racial disparities in its audit rates. A recent study found that Black taxpayers are audited at 2.9 to 4.7 times the rate of non-Black taxpayers, largely due to automated algorithms that flag discrepancies in claims for tax credits. To rectify this, the IRS plans to redeploy compliance resources and focus on other pressing priorities instead of disproportionately auditing low-income individuals.
This announcement comes on the heels of the IRS’s plan to increase audits on large partnerships, big corporations, and high-income taxpayers. Leveraging artificial intelligence for audits and utilizing additional funding from the Inflation Reduction Act, the IRS aims to improve tax compliance among high-wealth tax evaders and large, complex partnerships.
The IRS’s decision to rebalance its compliance initiatives has been met with praise from lawmakers. Senator Ron Wyden commended the agency for focusing on lower-income taxpayers’ mistakes while cracking down on wealthy tax cheats. He highlighted the importance of eliminating racial disparities in audit selection methods. Similarly, Representative Richard Neal applauded the IRS’s commitment to equity and its efforts to hold the wealthy and well-connected accountable.
Despite the positive reception, there are ongoing concerns about cybersecurity weaknesses at the IRS. A recent report by the Government Accountability Office (GAO) found longstanding vulnerabilities in the agency’s cybersecurity measures. The report highlighted the IRS’s failure to implement multiple GAO recommendations for safeguarding taxpayer information, including high-priority recommendations that would significantly improve data protection. Senate Republicans raised these concerns, emphasizing the need for the IRS to prioritize addressing security weaknesses and improving customer service.
As the IRS moves forward with its plans to rebalance its audit rates and improve tax administration, it will face scrutiny regarding its cybersecurity measures. However, the agency’s efforts to focus on aiding low-income taxpayers and targeting high-wealth individuals and corporations are seen as positive steps towards achieving equitable and efficient tax administration.