IRS Audits Are About to Surge—Here’s Who They’re Targeting

The Internal Revenue Service (IRS) is stepping up its enforcement game, setting its sights on specific taxpayer groups with a renewed focus on combating tax evasion and generating additional revenue for the U.S. government. But according to IRS Commissioner Danny Werfel, not every taxpayer will feel the scrutiny.

With an $80 billion boost from the Inflation Reduction Act (IRA) signed into law in 2022, the IRS is better equipped to fulfill its mandate. This funding is intended to help the agency bounce back from years of underfunding, operational challenges, and dwindling resources, which had led to issues such as long wait times for taxpayer assistance, delayed processing times, and decreased audits.

Recently, the IRS provided an overview of its revamped strategy to use these funds effectively, focusing on two core objectives: enhanced customer service and stronger enforcement. Thanks to the additional IRA funding, the IRS has already made significant progress in responding to taxpayer queries and has collected more than $520 million from wealthy taxpayers who either failed to file taxes or had outstanding dues. But the agency’s new approach means certain groups will face more scrutiny, while others may not notice any change.

Who Will See More IRS Audits?

The IRS’s new audit strategy doesn’t impact all taxpayers equally. Middle- and low-income taxpayers, especially those earning less than $400,000 annually, can expect to see audit rates remain stable. Instead, the IRS is zeroing in on high-net-worth individuals, large corporations, and substantial partnerships. Here’s a breakdown of who will likely see an uptick in IRS audits:

  1. Big Corporations
    • Target: Companies with assets exceeding $250 million.
    • Expected Increase: By 2026, large corporations could face three times as many audits as they did in previous years, with the audit rate expected to reach 22.6%, up from 8.8% in 2019.
    • Why It Matters: Large corporations often have complex financial arrangements, international dealings, and various tax deductions that can sometimes be used to reduce taxable income. With increased scrutiny, the IRS aims to ensure that these companies are paying their fair share and complying with federal tax laws.
  2. Large Partnerships
    • Target: Partnerships holding assets worth over $10 million.
    • Expected Increase: The IRS plans to increase audit rates for these entities from 0.1% in 2019 to about 1% by 2026.
    • Why It Matters: Large partnerships, such as private equity firms and hedge funds, often have complex structures that make it challenging for the IRS to verify reported income and deductions. By focusing more resources on this sector, the IRS intends to close potential loopholes and ensure greater transparency in high-value transactions.
  3. Wealthy Individuals
    • Target: Individuals earning more than $10 million annually.
    • Expected Increase: High-income individuals will see audit rates rise from 11% to 16.5% by 2026.
    • Why It Matters: The wealthiest taxpayers may engage in more sophisticated tax planning, including the use of offshore accounts and tax shelters. By focusing on high-income individuals, the IRS seeks to recapture potentially unpaid tax revenue and convey its commitment to enforcing tax compliance across all income brackets.

Commissioner Werfel emphasized that most Americans, particularly middle- and low-income taxpayers as well as small business owners, will not experience a significant increase in audits. Instead, by prioritizing high-wealth individuals, large corporations, and intricate partnerships, the IRS aims to target its resources where they can have the most significant impact, reassuring ordinary taxpayers of the agency’s targeted enforcement approach.

Dispelling the Myth of “87,000 Armed IRS Agents”

One of the more persistent rumors surrounding the IRS’s new funding is the idea that it plans to employ a massive wave of “armed agents” to enforce tax laws. 

Here’s what’s really happening: Over the past few decades, the IRS has seen a sharp decline in staffing, with total employment dropping from over 100,000 in the 1990s to roughly 73,000 by 2019. Due to retirements and budget cuts, this reduction in workforce led to delayed processing times, fewer audits, and decreased capacity for responding to taxpayer questions.

Now, with the recent boost from the IRA, the IRS workforce has risen back to around 90,000 employees. Over the coming years, the IRS aims to expand further, reaching an estimated 102,500 employees. However, many of these new hires will be replacing retiring workers rather than adding new positions. According to Werfel, this hiring strategy dispels the notion of the IRS amassing an oversized force. Additionally, the majority of the hiring will focus on enhancing customer service and support functions, not on increasing enforcement agents.

The IRS also pointed out that only a fraction of employees are “special agents” authorized to carry firearms. Special agents typically work on complex financial investigations involving potential criminal activity, which represents a very small portion of overall tax cases.

Why This Matters to Everyday Taxpayers

For most Americans, these changes mean that their interactions with the IRS may actually become more streamlined and responsive. The funding boost is already helping the IRS answer more taxpayer calls and improve its customer service capabilities, reducing the long-standing frustration many experience when trying to get assistance. By focusing audit resources on high-value and complex cases, the IRS aims to send a message to the wealthiest taxpayers and large corporations about the importance of tax compliance, while letting everyday taxpayers breathe a little easier.

IRS Enforcement Goals: Revenue and Fairness

The IRS’s ultimate objective is twofold: to increase tax revenue from those who owe substantial amounts and to foster fairness in the tax system. By prioritizing audits for large corporations, wealthy individuals, and large partnerships, the IRS hopes to close the “tax gap”—the difference between taxes owed and taxes paid—which is estimated to be in the hundreds of billions each year.

Increasing revenue through targeted audits is essential for funding various government initiatives and maintaining the integrity of the tax system. By focusing on high-value cases, the IRS also hopes to deter tax evasion among those with the most means to pay while avoiding putting undue pressure on lower-income taxpayers who may be more likely to make honest errors due to limited resources.

Future IRS Goals and Plans

Looking forward, the IRS intends to use its increased budget not just for enforcement but also for modernization efforts. This includes updating outdated technology systems, implementing better data analytics to identify potential tax evasion, and improving taxpayer education and resources. By investing in these areas, the IRS aims to enhance efficiency and accuracy in tax administration, ultimately providing taxpayers with a more user-friendly experience.

Commissioner Werfel has also stated that improving the taxpayer experience is a priority. This could mean faster return processing, fewer delays in issuing refunds, and more accessible guidance to help individuals understand their tax obligations and rights. By combining improved enforcement with better service, the IRS hopes to build greater public confidence in its role.

Final Thoughts

As the IRS moves forward with its newly funded strategy, it’s clear that the agency is focusing on targeted enforcement aimed at wealthier taxpayers, large corporations, and substantial partnerships. For most taxpayers, particularly those earning under $400,000 annually, this means that they won’t see a significant increase in audit rates.

The additional funding from the Inflation Reduction Act is an opportunity for the IRS to tackle long-standing issues in customer service and modernize its operations. By directing audit resources where they can be most impactful, the IRS is working towards a fairer tax system that prioritizes compliance without unnecessarily burdening average taxpayers.

Ultimately, the IRS’s approach represents a shift toward a more efficient, responsive, and equitable tax administration system. Everyday taxpayers can expect improved service and less likelihood of audit pressure, while those in complex, high-income brackets will face a greater focus on compliance.

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.