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Is the IRS setting its targets on the rich?

On Behalf of | May 23, 2024 | Audits |

Almost four years ago, the Department of Treasury called upon the Internal Revenue Service (IRS) to increase its federal tax audits of taxpayers with income of $10 million or more. Such audits were on the decline, likely, partly because audits of high earners are expensive. The higher the income, the more complicated and time-consuming the audit. In response, the department directed the agency to increase the rate of returns for this demographic by at least 8%.

As these audits are currently on track to reach that expected target, research shows the investment paid off. In one estimate, researchers found audits of the top 10% resulted in a $12 return for every $1 invested into the audit process.

What is the Future of Federal Tax Audits in the United States?

The research noted above provides data to support continued efforts to audit the wealthy, but the news is not all good for the IRS—hurdles remain. The Government Accountability Office (GAO) recently reviewed the IRS’s audit methods for this segment of the population as well as audits of taxpayers with an income of $500,000 or more. Although the GAO acknowledges the IRS has taken steps to improve audits of the wealthy, it finds issues remain. They include:

  • The IRS needs to establish effective methods for identifying tax evasion tactics used by wealthy taxpayers to improve audit targeting.
  • The agency must develop a framework for evaluating computer models used to select wealthy taxpayers for audits, ensuring they employ accurate criteria for flagging taxpayers.

A failure to address these and the GAO’s additional recommendations means the agency could improperly burden compliant taxpayers. A failure to fix improper computer models, for example, could trigger an unnecessary audit, wasting time and funds for both the targeted taxpayer and the government to navigate the audit process.

How Can I Prepare For an Audit?

Audits will continue as the IRS navigates the GAO’s recommendations. While the agency works through these matters, those who find themselves the subject of an audit are wise to take steps to protect their interests. Although various factors can trigger an audit, the process generally looks to determine the following:

  • Income substantiation: Taxpayers must verify the accuracy of reported income.
  • Deduction validation: Proper documentation must support claimed deductions.

Preparing for a federal tax audit involves thorough documentation and a clear understanding of tax obligations. High-income earners should maintain detailed records to substantiate income and deductions. Large, unusual, or questionable items on a tax return can raise red flags. Awareness of these triggers helps in preparing accurate returns and supporting documentation.

The legal ramifications of a tax audit can be significant. Consequences of discrepancies may include penalties, interest on unpaid taxes, and in severe cases, legal action.

With over three decades of experience, Kundra & Associates serves as a trusted advisor in tax matters for diverse clientele. Our expertise extends to Bethesda, Arlington, Rockville, Alexandria, Washington D.C., and beyond. We offer clear, effective counsel on strategies to prevent tax errors and navigate potential challenges. To benefit from our wealth of knowledge, please don’t hesitate to contact us online or via phone at 301-750-9717.