IRS Announces a ‘Soft Notice’ Approach Instead of Hitting Americans With Tax Audits

The Internal Revenue Service (IRS) building is seen in Washington on Sept. 28, 2020. Erin Scott/Reuters

The Internal Revenue Service (IRS) said in its recently released strategic plan that while it’s planning to get tough on wealthier tax dodgers, it would adjust enforcement efforts for ordinary filers to rely more on “soft notices” rather than tax audits.

The IRS on Thursday released its 150-page plan (pdf) for how it will use the $80 billion cash infusion provided by Congress to provide “better service” to taxpayers, hire more staff, and focus its enforcement efforts on high-income filers.

“Our efforts outlined in the Plan to provide better service to taxpayers, help them file accurately and resolve issues at filing, coupled with technology and data advances, will allow us to focus enforcement on taxpayers trying to avoid taxes, rather than taxpayers trying to pay what they owe,” IRS commissioner Daniel Werfel said in a memo to Treasury Secretary Janet Yellen.

Internal Revenue Service (IRS) commissioner nominee Daniel Werfel testifies before the Senate Finance Committee during his nomination hearing in Washington on Feb. 15, 2023. Kevin Dietsch/Getty Images

As part of the process of focusing its enforcement efforts not on taxpayers “trying to pay what they owe” but on those seeking to avoid paying taxes, the IRS plan includes a program of “tailored post-filing treatments” to resolve issues and omissions on tax returns.

“Tailored treatments will help the taxpayers to establish and maintain compliance and minimize the burdens on that taxpayer,” the plan states, pledging to “encourage” ordinary taxpayers who may not realize they’re non-compliant to become compliant using a softer approach.

‘Soft Notice’

The IRS believes most taxpayers “want to be compliant” and so the agency is developing a program involving a “tailored” approach where the agency uses “advanced analytics” to distinguish taxpayers who made good-faith mistakes on their tax returns from those trying to avoid paying what they owe.

The program would then notify the honest-but-errant taxpayers in a way that starts off with a gentle nudge to give them an opportunity to self-correct.

“Most taxpayers want to be compliant,” the plan states. “When issues are identified after filing, the IRS must help the taxpayer to become compliant as quickly and simply as possible.”

“We will address issues identified after filing that require IRS intervention promptly and in ways tailored to the specific circumstances of the taxpayer, such as a soft notice to encourage self-correction instead of an audit.”

“Notification could start with a soft notice, for example, and move to an audit if no action is taken or the issue remains unresolved.”

The IRS said that resorting to “less intrusive treatments” would give taxpayers who want to be compliant a quick and easy way to correct issues that have emerged after they’ve filed their tax returns while helping to prevent “unnecessary audits.”

As an outcome of the new initiative, the IRS hopes to see a higher incidence of taxpayers correcting or self-correcting issues, as well as a reduction in repeat noncompliance.

The IRS also expects the initiative to boost the incidence of taxpayers paying what they owe.

Changes in Audit Targeting

Republicans have raised concerns that the IRS funding boost would lead to tax enforcement crackdowns on middle- and lower-income Americans.

Sen. Mike Crapo (R-Idaho) has pushed for a limit on audits on those making below $400,000. However, Crapo has said he’s been unable to get Democratic support to codify the commitment.

Werfel pledged in a memo to Treasury Secretary Janet Yellen that the agency would adhere to Yellen’s stated goal of focusing enforcement efforts on high-income filers and not increase audits for those earning less than $400,000 per year.

“All efforts will comply with your directive not to use [Inflation Reduction Act] resources to raise audit rates on small businesses and households making under $400,000 per year, relative to historic levels,” Werfel said in the memo.

In a phone call with reporters, Werfel elaborated on this theme, while providing more details.

“People who get W-2s or Social Security payments, or have a small business, should not be worried about some new wave of IRS audits. We’re taking that off the table,” he said. “We have years of work ahead of us, where we will be 100 percent focused on building capacity for higher-income individuals and corporations.”

Tax agents will instead target “taxpayers with complex tax filings and high-dollar noncompliance,” according to the IRS operating plan, which indicates the agency will use more than half of the $80 billion that it received in new funding, or $47.4 billion, to enhance enforcement efforts.

Some Republicans have suggested that the new $80 billion cash infusion would help create a number of new armed auditors who would harass middle-class taxpayers.

Hiring Plans for Armed Agents

Werfel told reporters on a call that the share of staff working in the IRS Criminal Investigation (IRS-CI) unit would not climb above the current level of around 2.6 percent of the IRS’s overall workforce.

There are “no plans to increase” the hiring rate at the IRS-CI unit, Werfel said. “That will stay at its current rate.”

The IRS-CI examines potential criminal activity related to tax crimes and makes recommendations for prosecution to the tax division of the Department of Justice. Agents at the criminal investigations division are authorized to carry guns and use lethal force.

Dubbed “gun-toters,” the armed special agents in the unit are responsible for enforcing those parts of the tax code in which violations amount to crimes, according to former IRS Special Agent Robert Nordlander.

According to the IRS-CI’s annual report (pdf), there were roughly 2,077 special agents in the criminal investigations unit as of the 2022 budget year, which represents around 2.6 percent of the IRS’s entire workforce.

Carissa Cutrell, a public affairs officer at IRS-CI, told The Epoch Times in an emailed statement that the unit is hoping to hire between 300 and 350 special agents this year. Cutrell added that the unit loses between 150 and 175 agents each year to retirement and attrition.

If the IRS’s criminal unit hires between 300 and 350 armed agents this year and the next and overall IRS hiring climbs to 100,000 full-time employees as the strategic plan indicates, this will put the number of IRS-CI agents at between 2,677 and 2,777 by 2024.

Not factoring in any attrition, that would mean that the share of armed agents at the IRS’s criminal division would remain at roughly the current level of between 2.7–2.8 percent of the agency’s overall workforce.