IRS’s Tax Audits Slid After End of Program to Focus on Wealthy

(Bloomberg) -- The Internal Revenue Service has completed fewer audits of wealthy taxpayers since ending a program to focus on top earners, leading to as much as $1.9 billion in tax dollars going uncollected, according to a watchdog report released Monday.

The IRS stopped a program in 2017 that focused on auditing individuals earning at least $200,000. As a result, the number of audits on high-income taxpayers fell about 37%, representing a drop to about 29,600 in fiscal year 2019 from more than 47,000 in fiscal year 2015, according to the Treasury Inspector General for Tax Administration.

The report recommended the IRS create a plan to identify taxpayers making at least $200,000 who may be underreporting their true income to avoid taxes. IRS management, in a response included in the report, disagreed with that recommendation and said that the current audit processes sufficiently target high-earning taxpayers.

The debate over the effectiveness of the IRS’s audit programs comes as Congress considers a major injection into the agency’s enforcement arm. The Senate is negotiating a bipartisan infrastructure deal that includes $40 billion for the IRS to boost audit efforts with the goal of raising $100 billion more in tax collections.

Lawmakers and IRS officials alike have become increasingly concerned about high-income taxpayers underreporting their incomes on their tax returns. IRS Commissioner Chuck Rettig told a congressional panel earlier this year that the tax gap, or the difference in taxes paid versus taxes owed, could be as high as $1 trillion annually, an estimate that is many multiples higher than previous estimates.

Biden Proposals

Democrats have proposed to do even more to root out tax evasion.

President Joe Biden has proposed giving the IRS even more money -- as much as $80 billion -- for enforcement programs that the Treasury Department says could collect as much as $700 billion over a decade.

The Biden administration has also called for banks to report the account flows for some wealthy taxpayers, a move that would give the IRS more visibility into the incomes of some taxpayers that don’t already have their information automatically reported to government. Republicans have rejected that proposal, saying it would be government overreach.

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