National taxpayer advocate has concerns about $400,000 audit promise

By Martha Waggoner

One of the constant reassurances about the $80 billion allocated to the IRS from the Inflation Reduction Act, P.L. 117-169, has been this: The agency will not use the money to focus on small businesses or households earning less than $400,000 a year.

On Tuesday, National Taxpayer Advocate Erin Collins expressed doubt about that promise — made by the president, the Treasury secretary, congressional supporters of the bill, and IRS officials — because taxpayers could use it to assume they will not have to pay their fair share of taxes.

"One of the things I'm a little concerned about is when we keep hearing we don't want to increase audits under $400,000," Collins said at the AICPA & CIMA National Tax Conference held in Washington, D.C., and online. "I share the concern that we don't want to have audits that are incorrectly selected. We want to audit the right people, but I don't think we want to have a message to taxpayers that the IRS is not auditing anyone.

"We want a fair system. … You don't want people who are not filing tax to feel like, 'I don't have to because now the IRS is walking away.' I am concerned that between Congress, the secretary, and the press, we keep talking about this magical $400,000 number. We do want a fair system. We want people to pay their proper taxes. Do I want a huge percentage of people audited? No. But we want the right taxpayers audited."

Collins spoke during a question-and-answer session with Jan Lewis, CPA, chair of the AICPA Tax Executive Committee.

That session followed a speech by incoming acting IRS Commissioner Douglas W. O'Donnell, who officially takes his new post Nov. 12, and a panel discussion led by O'Donnell with other IRS leaders: Lia Colbert, commissioner, Small Business/Self-Employed Division; Kenneth Corbin, commissioner, Wage and Investment Division; Nikole Flax, CPA, J.D., LL.M., deputy commissioner, Large Business and International (LB&I) Division; Edward Killen, J.D., deputy commissioner, Tax Exempt & Government Entities Division; and James Lee, chief, Criminal Investigation.

O'Donnell reiterated the IRS promise regarding audits.

"Our investment is designed around Treasury directive that the secretary issued to us that audits do not rise relative to historic norms for households making under $400,000," he said. "Our enforcement activities will be focused on the bigs, the large, the high wealth, the complicated passthroughs. That's where we intend to go."

The funding in the Inflation Reduction Act opens new horizons for the IRS that its leaders could not even dream about in the past, O'Donnell said in his speech.

"It's like reimagining the possible," he said. "When we've led for years in an environment where we've been resource-starved, a lot of our decisions have been about what we're not going to do. Now we have an opportunity to think about what we could do. And that shift in thinking has challenged some of us where you thought you knew what you could do if you got significant funding, but as we work through the opportunities, it comes clear that there's more that we could do."

The IRS, he said, "will use these resources wisely and efficiently to achieve the improvements that we all know that we need."

Last week, the agency announced that it has hired 4,000 new customer service representatives and plans to hire 1,000 more before the heaviest part of the 2023 filing season begins. But the agency has 38,000 fewer workers than in 1992, when the U.S. population was 30% smaller, O'Donnell said. And it loses about 8,000 workers a year to retirements or resignations, he said.

One improvement that will make a huge difference in IRS services is multiyear, stable financing for information technology, which the IRS has not had in many years, he said, because of roughly 100 continuing resolutions since 2001.

"Every time we have a start-stop of funding, it puts us further behind. We cannot continue our work. We cannot make the progress that we want to make on these big, long-term investments, and it really hinders our ability to deliver in the way that we like to," O'Donnell said.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.

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