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Proposed IRS funding may affect auditing

On Behalf of | Aug 16, 2022 | Internal Revenue Service

With a spending plan heading towards a House vote, many are looking at one specific hot topic. That’s IRS funding of $80 billion with a little over half of that set for “enforcement,” the audit process. Many worry about increased “audit security on small business or middle-income Americans,” as stated in a letter to the Senate.

Audits are out of proportion

Between fiscal years 2015–2019, audits fell 44%. They fell 75% for millionaires while dropping only 33% for low-to-moderate filers who claimed the EITC (earned income tax credit). Some argue that the IRS depends on EITC claimants to balance their audit books. Many worry the new spending plan will support this.

How funding could affect IRS audits

Even if the legislation gets signed into law, it will be some time before it gets phased into the system. Newly hired auditors will get six months of training. After that it’s likely they will review cases worth a few hundred thousand dollars. That means audits may be likely to increase for the lower-income and the self-employed. With the progressing automated system, lower-income Americans who use less complex returns may trigger an audit.

How the IRS picks returns for auditing

The IRS utilizes software that ranks tax returns via a numeric score. The higher a score the more likely an audit gets triggered. The system often tags a return where credits or deductions concerning income fall outside acceptable ranges. An example is a taxpayer who claims a $100,000 charitable deduction on a $300,000 income. The agency’s software may flag that as that is disproportionate to what its system expects.

Other triggers for an IRS audit might be refundable tax credits (like the EITC), unreported income, auto or home office deductions and round numbers.

The goal of the funding

The IRS said in a report last year the funding will cover almost 90,000 employers, not just auditors, but IT workers and customer service representatives. In the end, the goal is to modernize the agency’s taxpayer services while increasing crackdowns on corporate and high-income tax evaders who drain hundreds of billions from the American people annually.

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