In August 2022, the Inflation Reduction Act (IRA) granted the IRS almost $80 billion in funding for a 10-year period, an amount that was eventually reduced to $57.8 billion. Out of this, $24 billion is set aside for enforcement activities. The same month, the Treasury secretary issued a directive to the IRS commissioner asking the tax agency not to use the additional IRA funding to boost audits on small businesses or households making less than $400,000 a year.

The Aug. 26 TIGTA report found that the IRS has made only "limited progress" in developing a methodology to comply with the Treasury directive, citing "planning and implementation challenges."

To comply with the 2022 Treasury directive, the IRS must first establish a historical "base year" audit rate for taxpayers with incomes less than $400,000 with which to compare future compliance.

Both the IRS and the Treasury have selected tax year (TY) 2018 as the base year. However, as of May 2024, the two agencies "have not finalized the methodology to calculate the TY 2018 audit coverage rate for tax returns with TPI [total positive income] under $400,000," the report notes.

The primary reason that the 2018 audit rate has not been calculated is that both the IRS and the Treasury have been exploring alternatives to the current methodologies for such calculations, the report notes.

The IRS already calculates audit rates based on income categories every year. For instance, for TY 2018, the audit rate for TPI between $200,000 and $500,000 was 0.3 percent.

Officials from the IRS told the TIGTA that the agency is not considering this standard approach for determining audit rates to meet the 2022 directive because it wants the flexibility to audit taxpayers who may purposefully underreport their TPI below $400,000 given that the agency intends to boost audit rates above this level.