IRS by Nick Youngson is licensed under CC BY-SA 3.0.
IRS says it needs “agility” to audit whomever it wishes.
The official IRS watchdog has found the IRS is unable to fulfill President Biden’s pledge not to increase audits on households or small businesses making less than $400,000 per year.
“There is no way to identify the complete population of taxpayers that meet the criterion of $400,000 or more specified by the current Treasury Secretary,” said the Treasury Inspector General for Tax Administration (TIGTA) in a new report.
“Biden’s $400,000 audit promise is not credible, as taxpayers suspected all along,” said Grover Norquist, president of Americans for Tax Reform. The Biden administration made the promise as it was desperate to impose a dramatic increase in the size and power of the IRS.
TIGTA recommended the IRS update its definition of “high-income” households from its current definition of $200,000 per year. But the IRS refused, asserting that it needs “agility” to target whomever it wishes.
Despite President Biden and congressional Democrats’ $400,000 pledge, the IRS’s definition of high-income taxpayer has not changed since 1976, when it was set at $200,000. As noted in the TIGTA report:
“The IRS does not have a unified or updated definition for individual high-income taxpayers. The Tax Reform Act of 1976 required annual publication of data on individual income tax returns reporting income of $200,000 or more. The current examination activity code schema still uses $200,000 as the main threshold.”
TIGTA found that employees are not equipped with training to fulfill the $400,000 promise:
“IRS training of revenue agents for high-income examinations lacks a clear definition of individual high-income taxpayers.”
TIGTA told the IRS that it should at least update the definition of high-income to $400,000:
“Because $400,000 will be an important threshold, the IRS needs to update the examination activities codes for individual tax returns.”
The report notes that the old definition of $200,000 “is no longer a reasonable standard for high earners given inflation since 2005. For example, there is no way to identify the complete population of taxpayers that meet the criterion of $400,000 or more specified by the current Treasury Secretary.“
Incredibly, the IRS refused the watchdog’s recommendation, asserting it needs “agility” to pursue whomever it wishes:
“The IRS disagreed with this recommendation. It asserted that a static and overly proscriptive definition of high-income taxpayers for purposes of focusing on income levels above which taxpayers have unique and varied opportunities for tax would serve to deprive the IRS of the agility to address emerging issues and trends.“
In its response to the IRS, the watchdog chided the agency because, “high-income terminology is being used loosely inside the IRS with no common understanding of what the term means.”
TIGTA told the IRS:
“The definition of high-income taxpayers does not have to be static. In fact, as demonstrated in this audit, the income threshold amount should be adjusted accordingly based on economic and complexity factors. In addition, as we have demonstrated in prior audits (such as TIGTA’s report Improvements Are Needed in Resource Allocation and Management Controls for Audits of High-Income Taxpayers (Report No. 2015-30-078) in which the IRS agreed to study the appropriate high-income thresholds and make changes accordingly) when the high-income thresholds are set too low, the result can be higher numbers of inefficient examinations.
When the definition is too low, the base of taxpayers earning those incomes is wider so that the IRS does many more audits in that category in order to achieve desired audit coverage, yet the audits are less productive because there is less opportunity for tax avoidance at lower incomes.
Currently, the high-income terminology is being used loosely inside the IRS with no common understanding of what the term means. At a minimum, the IRS should accept the Treasury Secretary’s $400,000 directive as the new high-income floor on which IRS leadership can focus enforcement efforts.”
The TIGTA report is titled, “The IRS Needs to Leverage the Most Effective Training for Revenue Agents Examining High-Income Taxpayers.”