Introduction
The IRA has released an updated Strategic Operating Plan (SOP), emphasizing its commitment to future priorities and transformative momentum following numerous successes that have benefited taxpayers. This updated plan is designed to improve taxpayer experiences while enhancing the efficiency and effectiveness of tax administration.
Key Milestones in Customer Service, Technology, and Data Security
Over the past year, the IRS has achieved significant milestones aligned with its long-term goals. Notable progress includes improving customer service, particularly in handling taxpayer inquiries and processing returns. With increased funding and resources, the agency has reduced the backlog of unprocessed returns and expedited refunds. Additionally, new digital tools have made interactions between taxpayers and the IRS smoother, providing a more user-friendly and efficient experience.
A cornerstone of the updated plan involves leveraging advanced technology and data analytics. By employing artificial intelligence and sophisticated data analytics, the agency can better identify non-compliance and allocate enforcement resources strategically for maximum impact.
To help individuals and businesses better understand their tax obligations, the IRS is prioritizing taxpayer education and outreach through new online resources, educational campaigns, and targeted outreach initiatives. Additionally, the IRS is implementing new safeguards to combat identity theft and protect taxpayer data, while improving internal systems to ensure robust data security.
Upcoming IRS Audits: Who is Affected and When?
In response to recent legislative changes and growing concerns over tax compliance, the IRS is ramping up its auditing efforts. Here’s a comprehensive look at who is most likely to be targeted by upcoming IRS audits and when taxpayers can expect increased scrutiny.
Why the Increase in Audits?
Recent legislation, particularly the Inflation Reduction Act (IRA) signed into law in August 2022, has infused the IRS with an additional $80 billion over ten years. Approximately $46 billion of this funding will be allocated to enforcement activities, resulting in a substantial increase in IRS audits, collections, and investigations.
Who Will Face Increased Scrutiny?
While the IRS intends to strengthen tax enforcement across the board, certain taxpayer categories are more likely to be targeted:
1. High-Income Earners and Corporations
- Taxpayers with an annual income over $400,000 will be a primary focus.
- Audits of taxpayers earning over $1 million annually are set to quadruple in the next five years.
- The IRS aims to double corporate audits, particularly focusing on multinationals and large corporations.
- Corporations with over $20 billion in assets are projected to see the audit rate increase by over 50%
2. Self-Employed Individuals
- Small business owners and freelancers are often flagged for potential tax underreporting or inaccurate deduction claims.
- The IRS intends to examine more pass-through entities, including S-corporations and partnerships.
3. Cryptocurrency Holders
- With the rapidly growing popularity of cryptocurrency, the IRS is keen to ensure taxpayers accurately report gains and losses.
- Enhanced reporting requirements will increase cryptocurrency audits, particularly among those who fail to report or underreport their holdings.
4. Noncompliant Filers
- Taxpayers who consistently fail to file or underreport their income will be targeted.
- The IRS is prioritizing enforcement against noncompliant taxpayers who have historically evaded tax obligations.
When Will the Audits Happen?
The IRS has outlined a timeline to bolster enforcement activities:
- 2023-2024
The IRS will gradually increase audits in these years, focusing on high-income earners and corporations. New hires, including 87,000 new IRS agents, will start to streamline enforcement. - 2025-2026
Significant increases in audits for high-income earners, large corporations, and cryptocurrency holders. Audits are expected to reach their peak during this period, with an estimated 1.2 million audits annually.
Numerical Statistics and Audit Data
- In 2022, the overall audit rate was 0.41%, the lowest in decades.
- Audit rates for taxpayers with incomes below $400,000 stood at 0.2% in 2022, compared to 3.2% for those above $1 million.
- The Inflation Reduction Act will result in over 1 million additional audits by 2031.
- High-income audits will quadruple from 39,000 in 2022 to over 160,000 by 2026.
How to Prepare for IRS Audits
Taxpayers can take proactive steps to minimize audit risks:
1. Accurate Record-Keeping:
Ensure thorough and accurate documentation of income, expenses, and deductions.
2. Consult a Tax Professional:
Seek advice on how to navigate new tax rules and accurately report income.
3. Stay Informed:
Remain updated on IRS audit trends and changes in tax compliance requirements.
4. Review Returns:
Double-check previous years’ returns for any discrepancies that may raise red flags.
Conclusion: A Comprehensive Vision for Transformation
The updated SOP reflects a comprehensive approach to improving the taxpayer experience and modernizing tax administration. As the IRS accelerates its transformation, taxpayers can anticipate a more responsive, technologically advanced, and efficient agency. This ultimately leads to a more equitable and effective tax system that benefits all stakeholders.
The IRS is undergoing a transformative expansion in its enforcement capabilities. High-income individuals, corporations, and self-employed taxpayers must brace for a higher likelihood of audits, particularly from 2024 onward. Remaining compliant and prepared is key to avoiding penalties and ensuring a smooth tax experience.
