The Internal Revenue Service's Large Business and International Division has expertise in training revenue agents on examining high-income taxpayers, but the IRS's efforts to train new hires don't appear to be fully leveraging this expertise, according to a new report.
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The Inflation Reduction Act provided nearly $80 billion in funding to the IRS over a decade, including $45.6 billion for enforcement activities. Last August, in response to warnings from Republicans that the money would be used to hire armies of IRS agents to pursue middle-class taxpayers and small businesses, Treasury Secretary Janet Yellen said the funding would be used to increase examination of high-income taxpayers, but that no additional resources, including any new hires, should be used to increase the share of small businesses or households below the $400,000 threshold that are audited relative to historical levels (
The TIGTA report came in response to requests from Congress for it to review the IRS's strategy for recruiting and training employees to conduct audits of high-income taxpayers and was expanded to encompass the significant enforcement funding in the Inflation Reduction Act.
The report recommended that since the IRS's LB&I Division has more expertise in training revenue agents on examining high-income taxpayers, it should revise its training paradigm and expose new hires to the types of issues associated with high-income taxpayer returns.
"An ineffective training strategy for new hires could reduce the impact of the IRS's compliance efforts for individual high-income earners and large businesses that underreport income," said the report.
Another part of the IRS, the Small Business/Self-Employed Division, showed no significant increase in the number of high-income individual audits in its fiscal year 2023 examination plan. The LB&I Division's resource allocation plan wasn't detailed enough for TIGTA to assess the IRS's intended efforts to examine high-income individuals with the increased enforcement funding. The IRS lacks a unified or updated definition for individual high-income taxpayers. The Tax Reform Act of 1976 required annual publication of data on individual income tax returns reporting income of $200,000 or more, and the current examination activity codes still use $200,000 as the main threshold.
The IRS's Inflation Reduction Act Strategic Operating Plan indicates the IRS plans to leverage data analytics to improve the agency's understanding of the tax filings of high-wealth individuals and to address potential noncompliance. Therefore, the IRS needs to update its high-income taxpayer definition to better identify and track examination results and manage examination priorities.
TIGTA made six recommendations in the report, including that the IRS leverage the LB&I Division's extensive knowledge base by embracing its current high-income individual training content and ensure that examination plans follow Yellen's directive to prioritize coverage of individual high-income earners over $400,000. The IRS agreed or partially agreed with five of the six recommendations, but disagreed with one recommendation.
"Our goal is not to provide a standard training program to all employees but rather to tailor each employee's professional development program to both their existing knowledge, skills, and professional experience as well as the specific work that they will perform," wrote Douglas O'Donnell, deputy commissioner for services and enforcement at the IRS, in response to the report. "The full scope and details of these initiatives are still being developed as part of the implementation process and the impact of these implementation activities will take time to fully realize."
