Jacob Ogles
Audits targeting high-income individuals skyrocketed under President Joe Biden. With President Donald Trump back in power, will the IRS change its focus?
With Trump-appointed IRS Commissioner Billy Long now sworn in, fiscal watchdogs and business advocates say now is a good time to review a doctrine that has prompted abusive penalties.
Business groups are joining together to call on the Trump administration to dismantle a revenue ruling that many believe led to the targeting of conservative-led businesses. Specifically, they state that Revenue Ruling 2024-14 has applied an economic substance doctrine, or ESD, to a few types of transactions that have unnecessarily prompted audits and tax penalties.
A Treasury Inspector General issued a report last week that showed the IRS planned to audit 70,000 households with incomes exceeding $400,000 per year in the 2024 fiscal year. That in particular can affect small business owners across the country.
The spike in audits was spurred by rules enacted under Biden and aimed at capturing federal revenue.
In 2022, the IRS hired thousands of new agents, although much of the funding for the tax-gathering agency was cut back as part of the Trump administration’s focus on government efficiency. Still, fiscal conservatives argue that much of the executive authority allowing for massive enforcement remains.
“Throughout the course of our work, we have become more convinced in our belief that, unless the IRS realigns its behavior toward the ESD in general and partnership activities in particular, even broader swaths of the tax filing population could be subject to harsh, onerous enforcement tactics at the hands of the government,” wrote Pete Sapp, President of the National Taxpayers Union, in a May letter to acting IRS Commissioner Michael Faulkender.
A group of lawmakers, including GOP Sens. Marsha Blackburn of Tennessee, John Barrasso of Wyoming, Steve Daines of Montana, and James Lankford of Oklahoma, has urged the Treasury Department to review compliance operations in the Large Business and International (LB&I) division.
In May, the Senators led a letter to Faulkender, stating that the rule enforcement unfairly targeted legitimate business structures.
“The IRS’s news release also referenced targeting ‘complex arrangements’ without providing clear definitions, creating the impression that legitimate business structures could be unfairly targeted based on their legal structure rather than actual compliance risk,” the letter read.
“Even more concerning, the announcement explicitly states that the bureaucratic changes were designed primarily to ‘achieve its goal of increased audit rates in this complex area’ rather than to address legitimate compliance concerns derived from an evidence-based risk assessment. This focus on increasing audits rather than improving compliance suggests an agenda-driven approach to enforcement.”
Conservatives hope Long will be more receptive to the message. The former Missouri Congressman, who will serve as IRS Commissioner through 2027, has been involved in business transactions as a real estate broker and auctioneer.
“In my first 90 days, I plan to ask you, my employee partners, to help me develop a new culture here,” Long promised in June. “I’m big on culture, and I’m anxious to develop one that makes your lives and the taxpayers’ lives better.”
Conservative groups, such as Americans for Tax Reform, have also lobbied to end the rule enforcement, as have business groups like the National Association of Manufacturers and the Small Business & Entrepreneurship Council (SBE Council).
SBE Council President Karen Kerrigan sent a letter to the IRS in May, applauding recent decisions, such as the April removal of a basis-shifting rule that was leading to audits. But she wrote that without a change to the ESD rule, further audits and abuse may still occur.
“Without revoking the Revenue Ruling, where the IRS should return to the interpretation of the economic substance doctrine that was relied upon during President Trump’s first term, the chilling effect on investment and growth will persist,” Kerrigan wrote.
