Are IRS audit rates increasing for high-income taxpayers?

Yes. IRS audit rates are rising for the first time in over a decade, with the sharpest increases targeting individuals earning over one million dollars, large corporations, and complex partnerships. The IRS is using Inflation Reduction Act funding to rebuild its examination capabilities.

What typically triggers an IRS audit?

Common audit triggers include significant discrepancies between reported income and third-party information returns, large or unusual deductions relative to income, complex partnership structures, and high total positive income. The IRS also uses data analytics to identify returns with high audit potential.

IRS Audit Rates Are Climbing: What the New Data Shows | Lynch Law

For the first time in over a decade, IRS audit rates are rising — and they are rising most sharply for the taxpayers the IRS has long identified as its enforcement priorities: high-income individuals, large corporations, and complex partnerships. Data from the IRS Data Book and reports from the Government Accountability Office confirm what tax practitioners have been seeing on the ground: the era of declining enforcement activity is over, and the IRS is using its Inflation Reduction Act funding to rebuild its audit capabilities.^[1]

The Numbers

IRS audit rates fell dramatically between 2010 and 2020. For individuals earning over $1 million, the audit rate dropped from approximately 8% to under 2%. For large corporations, the decline was similarly steep. For partnerships — which now account for a significant share of business income and an outsized share of tax complexity — the audit rate was negligible. These declines were driven by budget cuts and staffing losses: the IRS lost approximately 30% of its workforce between 2010 and 2020, with enforcement personnel bearing the heaviest losses.

The Inflation Reduction Act provided the IRS with approximately $80 billion in supplemental funding over ten years, with the largest share — roughly $46 billion — designated for enforcement. While subsequent legislation reduced the total appropriation, the remaining funds are substantial, and the IRS has used them to hire thousands of new enforcement personnel. The results are beginning to appear in the data: audit rates for high-income individuals have increased, the IRS has launched new enforcement initiatives targeting complex partnerships and large corporations, and the number of revenue agents in the field is growing for the first time in years.^[2]

Where the IRS Is Focusing

The IRS has been transparent about its enforcement priorities. Commissioner Werfel has stated repeatedly that the agency is focused on high-income individuals, large corporations, and complex partnerships — not on taxpayers earning less than $400,000. The specific initiatives include campaigns targeting non-filers with income over $400,000; audits of large partnerships using the centralized partnership audit regime enacted in the Bipartisan Budget Act of 2015; examinations of high-income individuals who use pass-through entities to underreport income; and scrutiny of abusive tax shelters, including syndicated conservation easements and certain microcaptive insurance arrangements.

For Mississippi business owners, the partnership audit initiative is particularly significant. Many closely held businesses operate as partnerships or multi-member LLCs taxed as partnerships, and the IRS has acknowledged that complex partnership returns have historically been under-examined. The centralized partnership audit regime gives the IRS a more efficient mechanism for auditing partnerships and assessing adjustments, and the IRS is investing heavily in training revenue agents to handle these complex returns.^[3]

What Triggers an Audit

The IRS uses several methods to select returns for examination. The Discriminant Information Function (DIF) score is a computer-generated score that rates the potential for a return to yield a significant tax change upon audit. Returns with high DIF scores are more likely to be selected. Related examinations — where one entity's return is selected because a related entity is already under audit — are another common trigger. Information matching (comparing reported income to W-2s, 1099s, and K-1s) identifies discrepancies that may warrant examination. And specific enforcement campaigns target identified compliance risks, such as the non-filer initiative and the conservation easement project.

Certain return characteristics increase audit risk. Large deductions relative to income, significant charitable contributions (particularly of non-cash property), net operating losses carried forward from prior years, foreign bank account reporting obligations, complex entity structures with intercompany transactions, and claims for tax credits (particularly the research credit and energy credits) all elevate the probability of examination. For partnerships, returns with large numbers of partners, complex allocation provisions, and significant losses or credits are more likely to be selected.

Defensive Positioning

The best time to prepare for an audit is before the return is filed. Defensive positioning means maintaining complete and organized records that support every item on the return; obtaining qualified appraisals for donated property, business valuations, and other items that require valuation; documenting the business purpose and economic substance of transactions that might be questioned; and ensuring that the return is prepared by a qualified professional who understands the compliance risks in the taxpayer's specific situation.^[4]

If you receive an audit notice, the first step is to contact experienced tax counsel. Do not respond to the IRS without professional guidance. The initial response to an audit — what information is provided, how it is organized, and how the taxpayer's positions are framed — can significantly affect the outcome. Taxpayers who engage qualified representation early in the process consistently achieve better results than those who try to handle the audit themselves or who wait until the examination has gone badly before seeking help.

The IRS has also expanded its use of data analytics to identify audit targets. The agency is investing in technology that allows it to analyze large datasets, identify patterns of non-compliance, and select returns with the highest potential yield. This means that even taxpayers whose returns would not have been selected under the old DIF-score system may now face examination based on the IRS's enhanced analytical capabilities.

Rising audit rates are a return to normalcy, not an aberration. For the better part of a decade, the IRS lacked the resources to enforce the tax laws against the most complex returns. That period is ending, and taxpayers — particularly high-income individuals and business owners — should plan accordingly. Proactive compliance, thorough documentation, and qualified professional guidance are the most effective responses to an IRS that is once again in the field.^[5]

References

^[1] IRS Data Book 2023, Publication 55-B (showing enforcement activity metrics including examination coverage rates by income class and entity type).
^[2] Inflation Reduction Act, Pub. L. No. 117-169, § 10301 (2022) (IRS supplemental funding: approximately $80 billion over ten years, with $45.6 billion for enforcement). Fiscal Responsibility Act of 2023, Pub. L. No. 118-5 (rescinding approximately $20 billion of the IRA appropriation).
^[3] Bipartisan Budget Act of 2015, Pub. L. No. 114-74, § 1101 (centralized partnership audit regime, codified at IRC §§ 6221-6241, effective for tax years beginning after December 31, 2017).
^[4] See IRM 4.10.2 (IRS examination process: initial contact, information requests, and examination techniques). Qualified representation during an audit is critical to protecting the taxpayer's rights and achieving the best outcome.
^[5] GAO, Tax Enforcement: IRS Needs to Improve Oversight of Third-Party Information Reporting, GAO-23-105425 (2023) (discussing IRS enforcement trends and the impact of budget constraints on audit coverage).