No matter the size of a household’s budget, the increasingly short-staffed and cash-strapped Internal Revenue Service has been conducting fewer audits in recent years — but wealthy households, while generally facing higher rates, have been seeing the sharpest decrease in likelihood of receiving an audit.
Furthermore, one tax credit geared towards low- and moderate-income workers becomes a red flag for an audit that’s higher than the average audit rate.
These are the findings of a new federal government watchdog report looking at IRS audits — and IRS funding levels — at a time when Democrats are keeping the volume cranked high on longstanding contentions rich taxpayers are not paying their fair share.
Across all incomes, the audit rate for individual tax returns dropped from 0.9% to 0.25%, according to the GAO report examining audit rate trends between tax year 2010 and tax year 2019.
“For the 2019 tax year, people making up to $25,000 were facing a greater chance of audit rate (0.40%) versus households making between $25,000 and $500,000 (0.17%).”
During that span, audit rates for taxpayers making up to $25,000 fell by 61%, researchers said. For taxpayers making between $500,000 and $5 million it was an 87% drop. Households above the $5 million threshold saw an 86% audit rate decrease.
“Although audit rates decreased more for higher-income taxpayers, IRS generally audited them at higher rates compared to lower-income taxpayers,” the GAO report said.
There’s exceptions to that pattern, which offered fodder for debate at Wednesday’s hearing.
For the 2019 tax year, people making up to $25,000 were facing a greater chance of audit rate (0.40%) versus households making between $25,000 and $500,000 (0.17%).
“There cannot be one tax system for the wealthy and one for everyone else. And yet, that is exactly what we have,” said Rep. Bill Pascrell, a Democrat from New Jersey, who heads the House Ways and Means Oversight Subcommittee. Pascrell and other lawmakers dug into the report from the Government Accountability Office (GAO) during a hearing on Capitol Hill on Wednesday.
Just over 1% of tax returns between $1 million and $5 million were audited in tax year 2019. For tax returns above the $5 million mark, the audit rate was 2.35%. In July 2020, the IRS launched a project to start more audits for the taxpayers at the very top.
Earned Income Tax Credit,
Another factor impacting working Americans: When taxpayers claimed the Earned Income Tax Credit, which is meant for low- and moderate-income taxpayers, the audit rate climbed on those returns to 0.77% during tax year 2019. Only tax returns reporting income above $1 million faced higher audit rates that year, the GAO report said.
Audits on the EITC are easier to carry out, the report said. But it’s also a complicated credit where improper payments can arise, the report added — a point that Republican lawmakers highlighted on Wednesday.
In fiscal year 2020, almost a quarter (23.5%) of EITC payments were improper, which totaled $16 billion, the IRS estimated in the report.
The latest report “indicates what we already know. There are real administrative issues around the Earned Income Tax Credit,” said Rep. Tom Rice of South Carolina, the subcommittee’s ranking Republican. The improper payments were “a huge problem and it necessitate audits,” he said.
“By early May, a backlog of hard copy returns was down to 1.7 million from 8.2 million at the start of the year, Ken Corbin, the IRS’s chief taxpayer experience officer, told lawmakers Wednesday.”
“Instead of criticizing the audit rate, let’s fix the underlying problem,” with a better-designed credit, said Rice, who also noted that there could be more oversight of the paid tax preparers who prepare and submit EITC claims to the IRS.
The latest report comes at a time when the IRS is facing scrutiny on many fronts after being tasked with so many pandemic-relief measures like stimulus checks and advance child tax credit payments. The latest tax season is over, but the IRS is still processing a backlog of last year’s tax returns.
By early May, a backlog of hard copy returns was down to 1.7 million from 8.2 million at the start of the year, Ken Corbin, the IRS’s chief taxpayer experience officer, told lawmakers Wednesday.
And then there’s the challenges on tax law enforcement. Treasury Department officials estimate there’s a $600 billion yearly gap between the taxes paid and the taxes owed, with top 1% responsible for more than one quarter of that divide.
“‘We face tough choices each year regarding where to deploy limited resources given the breadth of our responsibilities, but our choices are guided by fair and impartial audit plans throughout the process.’”
— Douglas O’Donnell, the IRS deputy commissioner of services and enforcement
The IRS has pushed back on arguments that rich taxpayers supposedly get a free pass when it comes to audits — but the agency’s commissioner, Charles Rettig, has also acknowledged his staff can get “outgunned” by well-heeled taxpayers. And that’s a strong reason why the agency needs more funding and personnel, he and others have said.
The GAO findings showed “we audit a greater percentage of high-income high-wealth taxpayers than those with lower income despite the fact that those audits tend to be the most complex and labor intensive,” Douglas O’Donnell, the IRS deputy commissioner of services and enforcement, said in a reply to the GAO report.
“We face tough choices each year regarding where to deploy limited resources given the breadth of our responsibilities, but our choices are guided by fair and impartial audit plans throughout the process,” O’Donnell later added.
The Biden administration wants the IRS to get $14.1 billion for the next budget year, an 18% increase of the 2021 enacted level. That would be much needed money, Corbin said, adding “We need help.”
The administration has pushed for an $80 billion investment in the IRS over the next decade.
The IRS might be constrained by the funding that Congress gives it and the tax laws they write for the IRS, Pascrell said. But he added, “Too many decision in the IRS involve what can be done, instead of what should be done,” Pascrell said, calling on the Biden administration to fire Rettig before his appointed term ends in November.
The IRS declined to comment.