The Inspector General for the IRS (TIGTA) reviewed the examination practices of the Large Business and International (LB&I) Division from fiscal year (FY) 2017 through 2021. LB&I’s examinations are divided between businesses and individual international taxpayers. About 67% of LB&I’s examinations were conducted on individual taxpayers totaling 63,420 audits. Of these, 90% of the taxpayers had a “total positive income” (TPI) of less than $200,000, and 3% of the taxpayers had a TPI of more than $1 million. TPI is defined as the income reported by taxpayers. Nonfilers are considered to have a TPI of $0. However, these audits are often faster than examinations of businesses. Examinations of individual returns had an average duration of 18 to 28 hours. For small businesses, the average audit duration was between 25 to 50 hours. For large businesses, the time was between 377 to 464 hours. The TIGTA was disappointed with the results of this concentration on individuals and recommended prioritizing business examinations for greater efficiency (more money retrieved per hour spent). The IRS agreed to reassess resource allocation.
This report also revealed a curious form of audit that comprised approximately 1% of all individual examinations, “Training Tax Returns.” These are defined as “[r]eturns selected for examination to supplement the training new examiners receive. They are selected based on the training module the new examiner has completed.” It is unclear what the precise status of a Training Tax Return audit is, but one can be audited by a trainee rather than an experienced agent.
The TIGTA also assessed IRS hiring practices, yielding insights into the current workforce. The number of full time equivalents (FTE) for all IRS enforcement decreased by 30% from 50,000 in FY 2010 to FY 2021. An additional $98 billion could have been collected during that time had the staffing level remained at the FY 2010 level. The Small Business/Self-Employed Division (SB/SE) is 20,000 employees strong yet is still 2,300 positions short of its authorized level. The LB&I Division has 4,600 employees and 450 vacant positions. The report indicates the speed of recruitment with an example. The IRS posted 448 job announcements (each may be for multiple positions) for LB&I and SB/SE enforcement between March and September 2022. During this half year, 95 employees for enforcement positions were onboarded. The report did not disclose whether this met the employee attrition rate.
The SB/SE Division’s plans for reallocating examination time to high earners are included in the report but have been redacted. A total of 89,838 examinations were closed by the SB/SE Division during FY 2021. This decreased to 82,368 audits in FY 2022. Categorizing by TPI level, there were 8,204 audits of taxpayers with a TPI greater than $1 million for FY 2021 and 7,507 examinations of such taxpayers in FY 2022. Judged by “[d]ollars recommended per hour of examination,” auditing taxpayers with a TPI of over $1 million is nearly 2.5x more efficient than auditing taxpayers with a TPI of less than $200,000.
If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.
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California has required employers to “indemnify” employees for “necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer” in substantially the same terms since 1937 under Labor Code § 2802.
