irs audit rates are dropping, and big earners couldn’t be happier

for the wealthy, the irs says it’s out-gunned.

by 卡塔尔世界杯常规比赛时间

the percentage of taxpayers audited by the irs has been in precipitous decline since 2010, with the steepest decline in – surprise, surprise! – the highest income bracket, according to a new study.

hoisted from comments: “it is not the auditors who are to blame. it is the irs processes that the auditors are following.”

the odds of a taxpayer being audited are astonishingly low, an average of just 0.25% in 2019, way down from 0.9% in 2010.

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audit rates for brackets between $25,000 and $500,000 are well below average, just 0.17%.

and though the rate for the highest bracket – incomes over $5 million – has declined the most, dropping from over 16% to just 2.35%, it is still higher than all other brackets, according to an investigation by the government accountability office.

low funding = short staffing

the irs attributed the general decline to a concurrent decline in funding. less funding has resulted in fewer agents and therefore fewer audits. worsening the situation, having fewer agents results in longer times to complete audits because audits tend to get transferred from agent to agent, each needing time to review previous work.

the average audit rate for the highest bracket bumped up three percentage points from 2017 to 2018 in response to a treasury mandate to maintain an audit rate of 8% for taxpayers raking in more than $10 million in a year.

short staffing = fewer audits = lower additional taxes

not only have audit rates declined, but the amount of additional taxes resulting from audits has generally declined since 2010. the decline steepened during the pandemic but rose significantly in 2021 as more audits were completed.

still, additional taxes in 2019 were the lowest they’d been since 2010, with the exception of 2019 and 2020.

predictably, the higher the income, the higher the additional taxes. in 2021, for taxpayers earning under $25,000, audits resulted in an average addition of $5,169. the $500,000-$5 million bracket audits brought in average additional assessments of $46,881. those over $5 million got whopped with an average bill of $284,810.

eitc is an audit magnet

earned income tax credit claims were audited three times more than the overall average in 2019. one big reason is that the audits are narrow in scope and less time-consuming than the more complicated returns of higher earners. eitc audits tended to have high rates of improper payments and therefore merited greater enforcement. like audits in the higher brackets, aitc audit rates have declined almost every year since 2010.

increase in audit times

the average number of hours spent per audit has increased 30% since 2010, rising from five hours to six and a half. the time required for audits in lower brackets remained relatively stable while higher income bracket audit times soared from about 20 hours to about 60.

sad to say, audits of lower incomes often have a higher rate of return per audit hour. this is especially true of eitc audits.

additional taxes per audit hour have remained generally stable for incomes up to $5 million. the rate of return for the $5 million-plus bracket, however, has declined sharply, from close to $20,000 per hour down to just under $5,000 in 2021, though that’s up from about $4,000 in 2019-2020.

the irs cited three reasons for the increased rates of return:

• attrition: as agents retire, new agents have to review past work before continuing.
• major work disruptions: covid-19 – not just the pause in work but also the time required to get back up to speed.
• tax law changes: agents have to learn about each new change.

the gao submitted a draft of the report to the irs, which agreed with all findings, though it suggested that analyzing by audit type might yield additional insights.

posted on june 21, 2022