The Internal Revenue Service has been auditing fewer taxpayers since 2010, according to a new report, but audit rates have been plunging the most for higher-income taxpayers.
A report released Tuesday by the Government Accountability Office found that in recent years, the IRS audited taxpayers with incomes below $25,000 and those with incomes of $500,000 or more at higher-than-average rates. However, audit rates have dropped for all income levels — with audit rates falling the most for taxpayers with incomes of $200,000 or more.
IRS officials blamed the decline in audit rates on staffing decreases and the fact that it takes more staff time and expertise to handle complex higher-income audits. According to IRS officials, those types of audits are usually more complex and require staff review. Lower-income audits are typically more automated, allowing the IRS to continue performing such audits even with fewer staff.
From tax years 2010 to 2019, audit rates of individual income tax returns decreased for all income levels, according to the findings. On average, the audit rate for these returns decreased from 0.9% to 0.25%.
While audit rates declined more for higher-income taxpayers, the IRS generally audited them at higher rates compared to lower-income taxpayers. However, the audit rate for lower-income taxpayers claiming the Earned Income Tax Credit was higher than average. “IRS officials explained that EITC audits require relatively few resources and prevent ineligible taxpayers from receiving the EITC,” said the report.
Audits of the lowest-income taxpayers, particularly those claiming the EITC, resulted in higher amounts of recommended additional tax per audit hour compared to all income groups except for the highest-income taxpayers. IRS officials explained to the GAO that EITC audits are mainly pre-refund audits and are conducted through correspondence and therefore require less time. In addition, lower-income audits tend to have a higher rate of change to taxes owed.
In 2019, the IRS audited 0.77% of taxpayers who claimed the EITC and 0.4% of those with incomes under $25,000, compared with 0.17% of those with incomes between $25,000 and $199,999 and 0.17% of those with incomes between $200,000 and $499,999.
From fiscal years 2010 to 2021, the majority of extra taxes the IRS recommended from audits came from taxpayers with incomes below $200,000. On the other hand, the additional taxes recommended per audit increased as taxpayer income increased. Over time, the average number of hours spent per audit was generally stable for lower-income taxpayers but more than doubled for those with incomes of $200,000 and above. According to IRS officials, the greater complexity of higher-income audits and increased case transfers due to auditor attrition contributed to the time increase. The IRS estimates that 15% of its current tax examiners and revenue agents will retire in the next three years.
“Auditing requires auditors to properly respond to taxpayers with increasingly complex business and investment activities,” wrote Douglas O’Donnell, deputy commissioner of services and enforcement at the IRS, in response to the report. “Greater complexity requires greater sophistication and skill as well as applying more time to perform the necessary review of information and to properly apply the law. The more complex the audit, the more time is required of our most experienced auditors and others involved (e.g. international and valuation) and Chief Counsel. The IRS has lost to attrition many thousands of employees, including those with the most sophisticated skills. We have been unable to replace them due to shrinking appropriations.”
House Ways and Means Oversight Subcommittee chair Bill Pascrell, D-New Jersey, had requested the GAO report and he blasted the findings.
“The findings by the GAO on IRS auditing rates are another five-alarm fire bell for our national tax system,” Pascrell said in a statement Tuesday. “Over the last decade, accountability for the wealthiest tax cheats has plummeted so far it almost hits the floor. Looking at the numbers, a tax filer making less than $25,000 a year is more than twice as likely to be audited as someone with between $200,000 and $500,000 in income. I worry well-off taxpayers are not going to be pursued at the rate things are going.”
His office noted that except for those with over $5 million in income, audits of the lowest-income taxpayers resulted in higher amounts of recommended tax per audit hour. The IRS collected about one-half of all recommended taxes between 2011 and 2020 with collection rates generally higher for those taxpayers with incomes under $200,000, including EITC recipients. That is probably because of the fact that the IRS conducts EITC audits before issuing refunds. High-income audits, according to the IRS, are more likely to have recommended tax amounts that are abated or more difficult to fully collect.
A separate report released Tuesday by the Tax Justice Network, an advocacy group, found the U.S. ranks highest on its Financial Secrecy Index for 2022. The report found that the supply of financial secrecy services, such as those used by Russian oligarchs, tax evaders, and corrupt politicians, has continued to decrease globally due to transparency reforms. However, five of the G7 countries — the U.S., the U.K., Japan, Germany, and Italy — are responsible for cutting global progress against financial secrecy by more than half.
“It isn’t just tax havens over here and everybody else is the good guys,” said Alex Cobham, executive director of the Tax Justice Network, during an online panel discussion Tuesday. “It’s a spectrum. Every country, every jurisdiction is more secretive than it might be and has work to do. This time, what we found is that the U.S. has gone to the top of the ranking, singlehandedly giving it the biggest secrecy value that we’ve ever seen, responsible for about 5% of all the global secrecy threats that underpin tax abuse and corruption worldwide.”