Werfel: IRS will audit individuals under $400K at 2018 rates

The IRS will use audit rates from 2018 to determine what percentage of individual taxpayers reporting income under $400,000 a year will be audited, IRS Commissioner Danny Werfel told the Senate Finance Committee on Wednesday.

Werfel’s answer to a question from Sen. James Lankford, R-Okla., seemed to assuage the concerns of the committee members who sought clarity on a promise from Treasury Secretary Janet Yellen and others who have said the audit rate for those filers would not exceed historic rates.

“We don’t know if that’s a number, if that’s a percentage, and if it’s a percentage or a number, which year that that is. Is it going to be a group of years? Because if you say this is the historical level and then you look back 10 years ago or versus five years ago versus 15 years ago, that’s a very different number, so help us with understanding what the word ‘historic level’ means,” Lankford said.

Werfel, who was sworn into office just over two weeks ago, said the rate will be taken from the 2018 data because that is the most recent year for which the IRS has final audit numbers. Returns from more recent years can still be audited, so those numbers may change, but 2018 is a closed book, he said.

“We’ll take the most recent final audit rate, and it’s historically low. It addresses some of your concerns that you raise in your question, and we will allow that to be the marker for at least several years, and then we’ll revisit it,” Werfel said.

The IRS groups audit rates for each year by income. In 2018, the audit rates ranged from 0.2% for returns of individual filers with incomes of $50,000 to $200,000 to 9.2% for returns of individual filers reporting income over $10 million, with a rate for all individual returns filed of 0.3%, according to the 2022 IRS Data Book released last week.

More important to individuals with incomes under $400,000, Werfel said, is that the IRS will not be focused on them.

“We are going to be so focused on increasing capacity for high-wealth taxpayers, individuals, corporations, and partnerships and complex partnerships that there will be no change to the most recent audit rate we have, the most complete final audit rate we have, for years,” he said. “Then even once we feel like we’ve done the necessary capacity-building in the high-wealth area, then it will take years to even get close to what might be a historical average versus where we are today.”

Congress appropriated almost $80 billion to the IRS as part of the Inflation Reduction Act of 2022, P.L.117-169. Of that money, $45.6 billion was allocated for enforcement, $3.2 billion for taxpayer services, $25.3 billion for operations support, and $4.8 billion for business systems modernization.

Earlier this month, the IRS released portions of its strategic operating plan.

Werfel reminded the committee that the Inflation Reduction Act dollars were meant to be in addition to, not instead of, the annual appropriation for the IRS.

“I go back to the fact that we have to make a decision in terms of what we want from the IRS,” he said. “If we’re funded at a steady level or cut, then all we can do is maintain our current operation. We have to make investments to deal with this complexity of what we see today.”

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