The IRS Digs Deeper

Episode 294 – For several years, the IRS has been focusing its audit activity on people making more than $10 million per year. But the results have been disappointing, and the IRS has decided to aim lower.

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Transcript of Podcast Episode 294

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, the Internal Revenue Service (IRS) is deemphasizing their focus on ultra-high net worth taxpayers. They are now targeting “ordinary” wealthy people.[1]

In 2020, the IRS announced a new policy: They were now required to audit at least 8 percent of taxpayers who earned at least $10 million.[2] It seemed to be a good move from a public relations perspective, but in order to meet their quota, they ended up auditing some returns that contained few, if any, red flags.[3] 

The numbers didn’t work out so well. A significantly high percentage of the audits that took place resulted in no change to the amount of tax due, according to the Treasury Inspector General for Tax Administration.[4] It is estimated that the average dollars assessed per return, that is, the average amount the IRS collected for audits above $10 million, dropped by 93 percent in the process.[5] 

So, the IRS decided to abandon their policy late last year. They are now going after a much bigger segment of the population: making more than $400,000 per year.

The oft-cited $400,000 figure makes sense in this case. During his 2020 campaign, President Biden pledged that he wouldn’t raise taxes on anyone earning less than that amount. And in 2022, the Treasury Department issued a directive that the IRS could not use its new funding from the Inflation Reduction Act, which comes to $60 billion, to increase audits on people making less than $400,000.[6]

The policy change—going from $10 million to $400,000—is also a matter of simple statistics. By casting a wider net, the IRS hopes to generate more revenue. There are just more potential targets once you lower the threshold.

$400,000 is certainly a good-sized income, but it is not considered ultra wealthy. According to Bankrate, in 2022, the top 1 percent of earners made $785,968 in wages, nearly twice the $400,000 benchmark.[7]

In some ways they seem to be aiming even lower. According to the Inspector General, 63 percent of IRS audits last year were conducted on people earning less than $200,000.[8]  In other words, despite their claims otherwise, the IRS is still closely examining the returns of lower- and middle-income taxpayers.

Then there’s the agency’s fiasco over its policy changes on Form 1099k. IRS Form 1099k is used whenever someone receives money from a third-party network such as Venmo, PayPal, etc.  Prior to 2022, businesses were required to issue a 1099k to anyone who collected a total of more than $20,000. 

But in November of 2022, the IRS sent a reminder that there was a new rule lowering that threshold to $600. This would ensnare a lot more gig workers and small businesses, as well as individuals selling small items from their homes. 

After public outcry, the IRS backed off and left the old rule in place for 2022 and 2023. For 2024, the IRS is phasing in the new rule with a threshold of $5,000.[9]  Without any further changes, the $600 threshold will be effective in 2025.

So, despite what they say publicly, the IRS seems to feel that taxing the rich can only go so far. There simply aren’t enough people making over $10 million per year. If they want to raise as much money as they can, they are going to have to look at more people.

[1] Longo, Tracey. “IRS Audits Shift Focus From Ultra-Affluent Individuals To The Mere Wealthy.” FinancialAdvisor.com. https://www.fa-mag.com/news/irs-audits-of-millionaires-raise-more-revenues–so-why-pivot-to-middle-class-78592.html?section=43 (accessed July 9, 2024).

[2] Wall Street Journal Editorial Board. “The IRS Has a High-Earner Delusion.” WSJ.com. https://www.wsj.com/articles/irs-audits-wealthiest-americans-tigta-report-steven-mnuchin-janet-yellen-4d3f678c (accessed July 9, 2024).

[3] Wall Street Journal Editorial Board. “The IRS Has a High-Earner Delusion.” WSJ.com. https://www.wsj.com/articles/irs-audits-wealthiest-americans-tigta-report-steven-mnuchin-janet-yellen-4d3f678c (accessed July 9, 2024).

[4] Longo, Tracey. “IRS Audits Shift Focus From Ultra-Affluent Individuals To The Mere Wealthy.” FinancialAdvisor.com. https://www.fa-mag.com/news/irs-audits-of-millionaires-raise-more-revenues–so-why-pivot-to-middle-class-78592.html?section=43 (accessed July 9, 2024).

[5] Wall Street Journal Editorial Board. “The IRS Has a High-Earner Delusion.” WSJ.com. https://www.wsj.com/articles/irs-audits-wealthiest-americans-tigta-report-steven-mnuchin-janet-yellen-4d3f678c (accessed July 9, 2024).

[6] Longo, Tracey. “IRS Audits Shift Focus From Ultra-Affluent Individuals To The Mere Wealthy.” FinancialAdvisor.com. https://www.fa-mag.com/news/irs-audits-of-millionaires-raise-more-revenues–so-why-pivot-to-middle-class-78592.html?section=43 (accessed July 9, 2024).

[7] Royal, James. “What income and wealth put you in the top 1%?” bankrate.com. https://www.bankrate.com/investing/income-wealth-top-1-percent/ (accessed July 10, 2024).

[8] Longo, Tracey. “IRS Audits Shift Focus From Ultra-Affluent Individuals To The Mere Wealthy.” FinancialAdvisor.com. https://www.fa-mag.com/news/irs-audits-of-millionaires-raise-more-revenues–so-why-pivot-to-middle-class-78592.html?section=43 (accessed July 9, 2024).

[9] Internal Revenue Service “IRS announces 2023 Form 1099-K reporting threshold delay for third party platform payments; plans for a $5,000 threshold in 2024 to phase in implementation.” IRS.gov. https://www.irs.gov/newsroom/irs-announces-2023-form-1099-k-reporting-threshold-delay-for-third-party-platform-payments-plans-for-a-5000-threshold-in-2024-to-phase-in-implementation (accessed July 11, 2024).

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