In a recent report, the Treasury Inspector General for Tax Administration (TIGTA) offered its findings on how the IRS is complying with a 2022 directive from the secretary of the Treasury not to use any additional resources to increase audits on small business or households earning below $400,000 per year. TIGTA reported that the IRS has not finalized its methodology for the audit coverage calculation.

On Aug. 10, 2022, Treasury Secretary Janet L. Yellen issued a letter to the IRS commissioner directing the IRS not to use any additional resources to increase audits on small business or households earning below $400,000 per year. Inflation Reduction Act enforcement funding was intended in part to increase examinations of high-income taxpayers. She said, “The Inflation Reduction Act includes much-needed funding for the IRS to improve taxpayer service, modernize outdated technological infrastructure, and increase equity in the tax system by enforcing the tax laws against those high-earners, large corporations, and complex partnerships who today do not pay what they owe. Specifically, I direct that any additional resources—including any new personnel or auditors that are hired—shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels. This means that, contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited. Instead, enforcement resources will focus on high-end noncompliance.”

In order to comply with this directive, TIGTA stated, the IRS and Treasury needed to “establish a base year upon which to compare future compliance with the Directive.” It reported that “although the IRS and the Treasury Department chose Tax Year 2018 for the base year, the IRS has yet to calculate the audit coverage for Tax Year 2018 because it has not finalized its methodology for the audit coverage calculation. While the IRS routinely calculates audit coverage rates, the IRS and the Treasury Department have been exploring a range of options to develop a different methodology for purposes of determining compliance with the Directive.”

During the audit, TIGTA expressed concerns "that the waiver criteria had not been clearly articulated and that such a broad authority may erode trust in the IRS’s compliance with the Directive." Specifically, TIGTA reported, "In May 2024, the IRS concluded that excluding types of examinations from the calculation of the base and comparison year audit rates has the potential to undermine the Directive, and it abandoned the concept of exclusions and waiver authority. The IRS is not currently considering the potential of a marriage penalty that would subject married couples filing jointly with a combined total positive income of $400,000 to the same audit risk as an individual taxpayer with a total positive income of $400,000. When asked if this would be unfair to those married taxpayers, the IRS stated that the 2022 Treasury Directive made no distinction between married filing jointly and single households, so neither will the IRS."

TIGTA added, "The IRS stated that any deliberations to date should not be considered as definitive determinations until such time as the methodology is finalized. Before any decisions are made as to how the audit coverage rate will be calculated, the IRS and the Treasury Department would need to come to an agreement. However, the IRS has not maintained formal documentation on its decisions and processes to clearly document all exchanges of information and other significant events pertaining to the 2022 Treasury Directive.”

TIGTA made four recommendations to the IRS. TIGTA recommended that the IRS deputy commissioner "accelerate discussions with the Treasury Department to finalize the audit rate methodology for the 2022 Treasury Directive," and also "document the development of the methodology established to ensure compliance with the 2022 Treasury Directive. The IRS agreed to both recommendations." TIGTA also recommended that the deputy commissioner use Return Transaction File (RTF)  data to produce counts of filing data above and below the $400,000 threshold, rather than relying on Statistics of Income (SOI) sampling data that support the IRS Data Book. The IRS disagreed with this recommendation. 

Finally, TIGTA recommended that the deputy commissioner "establish procedures and controls to ensure that the appropriate field in the Audit Information Management System (AIMS) is updated to include the taxpayer’s reported total positive income (TPI) plus unreported income identified during the examination in order to develop a measure of post-audit TPI." The IRS partially agreed with this recommendation. TIGTA reported that "the IRS will verify TIGTA’s analysis that AIMS has a separate field that can be used to report post-audit TPI as the IRS wants to retain TPI as filed by the taxpayer for historical purposes. If there is a separate field, the appropriate Business Operating Division Commissioners will develop Internal Revenue Manual procedures and controls to update TPI as a result of an examination that increases reported income."