IRS Pledge Not to Audit: What It Means and Who It Covers
Understand the IRS pledge not to audit certain filers, its limitations, and how to navigate documentation requests and official communications.
The IRS recently announced a pledge to limit audits for certain taxpayers, sparking interest and some confusion. This move is part of broader efforts to rebuild public trust and focus enforcement resources. Understanding this pledge is helpful for taxpayers navigating filings and record-keeping.
While the announcement sounds reassuring, the new guidance does not apply equally to all taxpayers or situations. Some areas remain subject to scrutiny, and the need for documentation persists.
Which Filers Are Covered by the Pledge
The IRS pledge primarily targets taxpayers based on income levels, stemming from directives related to Inflation Reduction Act funding. The core commitment is that audit rates, funded by these new resources, will not increase relative to historical levels for households earning less than $400,000 per year.1U.S. Department of the Treasury. Secretary Yellen Sends Letter To IRS Commissioner In Support Of Funding This threshold aims to concentrate enhanced enforcement on high-end noncompliance, including high-income earners, large corporations, and complex partnerships.2Internal Revenue Service. IRS Announces Sweeping Effort To Restore Fairness To Tax System With IRA Funding
The $400,000 figure applies to households across various filing statuses. IRS Commissioner Danny Werfel clarified that the measurement used is “total positive income” (TPI), calculated as the sum of all positive income amounts on a return, treating losses as zero.3Treasury Inspector General for Tax Administration. TIGTA Report: Limited Progress On $400k Audit Rate Methodology TPI differs from Adjusted Gross Income (AGI) as it doesn’t subtract losses or certain deductions. A business owner with gross receipts over $400,000, for instance, might exceed the threshold based on TPI even if their net income after expenses is lower.
This pledge is intended to extend to small businesses, though a precise definition for this purpose is still being developed by the Treasury Department and the IRS. Officials state the goal is to shield typical small businesses, like “mom-and-pop stores,” from increased audit scrutiny funded by the new resources. The baseline for comparison, referred to as “historical levels,” corresponds to the audit rates for the 2018 tax year.4Treasury Inspector General for Tax Administration. TIGTA Report: Assessment Of IRS Strategic Operating Plan 2024 Update These rates were particularly low, partly due to IRS resource constraints at the time. The commitment ensures taxpayers and small businesses under the $400,000 TPI threshold won’t face audit rates higher than those observed for 2018, using the additional funding.
Areas the Pledge May Not Include
The IRS pledge has limitations. The directive from the Treasury Secretary specifies that additional IRA resources should not increase the share of audits for households under $400,000 TPI or small businesses, relative to the low rates of tax year 2018. This does not grant immunity from audits altogether, nor does it restrict IRS enforcement actions funded through its regular, pre-IRA appropriations.
Enhanced enforcement efforts funded by the IRA are explicitly focused on high-end noncompliance. This includes individuals above the $400,000 threshold, large corporations, and complex partnerships. The IRS plans to significantly increase audit rates for these groups, using new funding and technology like Artificial Intelligence to identify sophisticated tax evasion. For example, the agency aims to triple audit rates for corporations with assets over $250 million and increase rates tenfold for large partnerships with assets over $10 million by tax year 2026, compared to 2019.5Internal Revenue Service. IRS Inflation Reduction Act Strategic Operating Plan Individuals with TPI over $1 million and recognized tax debt exceeding $250,000 are another priority.
The pledge centers on audit rates not increasing due to IRA funds for the under-$400k group. It doesn’t prevent the IRS from addressing specific compliance issues within that group using regular funding, provided the overall historical audit rate isn’t surpassed using the new resources. Compliance efforts continue in areas like digital assets, foreign bank account reporting (FBAR) for high-balance accounts, abusive tax shelters, and partnership balance sheet discrepancies. Programs involving credits like the Earned Income Tax Credit (EITC) also remain subject to compliance checks, although the IRS is working on improvements for these audits. The agency is still finalizing the methodology for calculating the baseline audit rate and defining “small business,” adding complexity.
Documentation That Could Still Be Requested
The fundamental requirement to maintain and provide documentation supporting tax returns remains unchanged, regardless of the IRS pledge on audit rates. The burden of proof rests with the taxpayer, meaning adequate records must be kept to substantiate all reported items.6Internal Revenue Service. Burden Of Proof The pledge primarily concerns the allocation of specific audit resources, not the basic rules of tax compliance.
IRS inquiries can take forms other than full audits. Automated systems compare information from third parties (like W-2s and 1099s) with individual returns. If the Automated Underreporter (AUR) system flags a discrepancy, the IRS may issue a CP2000 notice.7Internal Revenue Service. Topic No. 652, Notice Of Underreported Income – CP2000 This notice proposes adjustments based on mismatched information and requires documentation to resolve, even for those below the $400,000 income threshold.
Maintaining thorough records is necessary for all taxpayers. Key documents include:
- Income documentation: W-2s, 1099 forms, K-1s, bank statements, business sales records.
- Expense receipts: Bills, canceled checks, credit card statements, invoices for deductions (medical, charitable, business, education). Specific logs are often needed for travel, entertainment, gifts, and auto use.
- Property records: Documents for purchase, sale, and improvement of assets (homes, investments) to calculate basis and gain/loss.
- Other supporting documents: Legal papers, loan agreements, medical records, or employment documents relevant to return items.
The IRS provides guidance on record retention periods:8Internal Revenue Service. How Long Should I Keep Records?
- Keep records for three years from the filing date or due date (whichever is later) for most situations.
- Keep records for six years if you underreport income by more than 25% of the gross income shown on your return.
- Keep records for seven years for claims involving worthless securities or bad debt deductions.
- Keep property records indefinitely or until the limitation period expires for the year the property is disposed of.
- Keep records indefinitely if a fraudulent return is filed or no return is filed.
- Keep employment tax records for at least four years after the tax is due or paid.
Organized documentation allows for prompt and accurate responses to any IRS inquiry.
How to Verify Official Statements
To confirm statements made by the IRS, rely on primary, official sources. The IRS website, IRS.gov, is the central hub for news releases, official guidance, and strategic plans. Statements from the Commissioner often appear in the “Newsroom” or “Statements and Announcements” sections.9Internal Revenue Service. IRS Statements And Announcements Archive Directives from the Treasury Secretary can usually be found on the U.S. Department of the Treasury’s website, home.treasury.gov.10U.S. Department of the Treasury. Press Releases
For deeper context, review documents like the IRS Strategic Operating Plan, available on IRS.gov. This plan outlines agency priorities and the use of funds, providing the official framework for initiatives like the audit pledge. Verifying specifics involves consulting these foundational documents released directly by the agency or the Treasury.
Understanding the hierarchy of official tax guidance is also helpful. While press releases communicate plans, they generally lack the legal weight of formal guidance published in the Internal Revenue Bulletin (IRB).11Congressional Research Service. Reliance On Treasury Department And IRS Tax Guidance The IRB contains authoritative rulings and procedures interpreting tax law. Treasury Regulations represent more formal interpretations. Taxpayers can generally rely on IRB guidance, while other communications like website FAQs may not carry the same precedential value unless specified.
The Taxpayer Advocate Service (TAS), an independent organization within the IRS, is another resource. TAS reports, available on the IRS website, offer insights into IRS operations and the practical application of policies. While news articles can be informative, cross-referencing claims against official IRS, Treasury, and TAS publications ensures reliance on accurate, agency-sanctioned information.