The IRS has made “limited progress” in determining how many audits it is performing on taxpayers earning less than $400,000, according to a new watchdog report.

The magic number is needed to ensure that none of the Inflation Reduction Act of 2022 (IRA) $24 billion in funding earmarked for stepped up IRS enforcement of high-end filers is being used to increase audits on small businesses and households earning below $400,000 a year, the Treasury Inspector General for Tax Administration said in its new annual report.

But two years after receiving the funding and just one month before the IRS will begin auditing 2021 tax returns, the IRS has still not developed a methodology to provide audit numbers to prove it is not using any additional resources for such audits, Danny Verneuille, acting deputy inspector general, said in the new report issued last week.

The hold up in audit numbers is due to a lack of urgency and challenges in IRS planning and implementation, according to Verneuille, who urged the IRS to pick up the pace.

“The IRS has not established a timeline to develop the definitions and calculations because the IRS believes it has ample time to develop the methodology," the report said, adding, "currently [the IRS] does not perceive the development as an urgent matter." The deadline for the IRS to develop methodology to track its audits is October 2024.

Treasury Secretary Janet Yellen’s directive in April 2022 emphasized that IRS enforcement funding was intended to increase examinations of high-income taxpayers—not taxpayers bringing in income or revenues of less than $400,000—and that the IRS had to track audit rates to ensure that was the case.

The issue may become more important in an election year since Vice President Kamala Harris, the Democratic presidential nominee, has embraced President Joe Biden’s vow not to tax households earning less than $400,000.

The IRS has at least a four-year history at failing to focus its efforts on high-income tax filers, according to the Inspector General eport.

The report said that history includes the following:

• In fiscal year 2020, the IRS inspector general reported, the IRS “had a lack of focus on high-income taxpayers who had not filed tax returns and reported that hundreds of thousands of high-income nonfilers not being pursued.”
• The IRS terminated its High-Income Examination Initiative in FY 2021, at which point the inspector general recommended that the IRS needed to step up its efforts to track the results of high-income audits it performs.
• In fiscal 2023, “the IRS for a second time disagreed with the Inspector General’s recommendation to increase the IRS’s definition of high-income taxpayers from $200,000 to at least $400,000.”
• In fiscal 2024, the inspector general reported that the IRS “had terminated its efforts to comply with a 2020 Treasury Directive by the previous Treasury Secretary that directed the IRS to audit at least 8% of taxpayers with incomes of $10 million or above because the audits."

In the most recent year of finalized audit data, the 2019 tax year, the IRS said it subjected 11% of returns with total positive income of at least $10 million to audits. That’s up from 9.9% in 2018 and less than 7% in 2017.

In the latest report on finalized audit data (tax year 2019), the audit rates for those making less than $400,000 are 0.2% to 0.4%—essentially identical to the 2018 rates for returns under $500,000, according to the IRS.

One advisor said she has clients earning less than $400,000 who have been audited.

In 2022, “my clients sold their single-family home in northern Virginia ... and informed me that the sale of their primary residence triggered an audit,” said Margeurita Chen, CEO of Blue Ocean Global Wealth in Potomac, Md.

The couple had $380,000 in capital gains on their primary residence. But “they were able to provide the required documentation to the IRS and the case has been resolved,” Chen said.