On May 2, 2024, the IRS released its Strategic Operation Plan (“SOP”) for the future. In this plan, it was revealed that the IRS aims to increase the number of tax examinations significantly.
As a background, in August 2022, the U.S. Congress passed the Inflation Reduction Act (“IRA”), which aimed to invest in clean energy and reduce the budget deficit. With this law, a total of $80 Billion in additional funding was allocated to the IRS to increase tax revenues by strengthening tax enforcement. Specifically, the main focus was to increase revenue by modernizing the IRS to improve its services and strengthening tax examinations. Subsequently, in June 2023, the negotiations between Republicans and Democrats to reduce the budget deficit resulted in a reduction of $20 Billion from the additional budget for the IRS. Still, for the IRS, whose budget has been continuously cut, this additional budget represented a significant win. For the IRS facing a variety of challenges, this SOP is being viewed as a major step toward reform.
The SOP announced on May 2, 2024 has five main goals:
- Dramatically improve services to help taxpayers meet their tax obligations and receive tax incentives for which they are eligible.
- Quickly resolve taxpayer issues when they arise.
- Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.
- Deliver cutting-edge technology, data and analytics to operate more effectively.
- Attract, retain, and empower a highly-skilled, diverse workforce, and develop a culture that is better equipped to deliver results for taxpayers.
Improvement efforts will be undertaken in various areas to meet the major goals outlined above. The SOP also states that the goal is to increase tax examinations on the wealthiest taxpayers, large corporations, and large, complex partnerships.
- Wealthy Individual Taxpayers:
Increase the tax audit rate by more than 50% for wealthy individual taxpayers with total positive income over $10 Million, from 11% in FY 2019 to 16.5% in FY 2026.
- Large Corporations:
Triple the tax audit rate for large corporations with assets over $250 Million from 8.8% in FY 2019 to 22.6% in FY 2026.
- Large, Complex Partnerships:
Increase the tax audit rate for large, complex partnerships with assets over $10 Million by nearly tenfold, from 0.1% in FY 2019 to 1% in FY 2026.
It should be noted that there will be no increase in the tax audit rate for small businesses and individual taxpayers with an income under $400,000.
However, in addition to the number of tax audits announced this time, it will also be necessary to focus on the “quality” of tax examinations in the future. The IRS has a problem with “zero adjustment,” which means that the tax examination is completed with no adjustments or corrections. In Japan, it is very rare for a tax examination to be completed with zero adjustments or corrections, but in the U.S., zero adjustments have become the norm. In FY 2019, it is estimated that 38% of the tax examinations for companies with assets over $10 Million were completed with a zero adjustment, and this percentage is on the rise from 28% in FY 2010. One reason for this problem may be that the U.S. tax system has become more complex and difficult for the IRS examiners, while the taxpayers have focused their efforts on preparation and compliance, resulting in a widening gap between the two sides.
The IRS has been allocated an additional budget this time, but it may not be an easy task to reform the IRS, as it faces various challenges such as maintaining its examination capability in the face of an increasingly complex tax system, the retiring of experienced examiners (the baby boomer generation), and continuous tightening of the U.S. labor market. We will continue to pay close attention to IRS reforms and tax examinations.
Disclaimer: All views expressed in this article are solely for informational purposes and should not be construed as legal advice. This information is for reference only and is bound to change in case of any amendments or changes to applicable laws. We do not assume any responsibility or liability for any errors or omissions in the content of this article, and do not make any warranties about the completeness, reliability and accuracy of the information expressed in this article.
