Tax audits are down. By a lot. Internal Revenue Service audit rates of individual taxpayers’ returns have dropped for all income levels from tax years 2010 to 2019, according to a new Government Accountability Office report.
On average, individual tax returns were audited over three times more often for tax year 2010 (0.9 percent) than for tax year 2019 (0.25 percent). Audit rates for taxpayers with incomes between $200,000 and $500,000 saw the biggest drop (a 92% drop), from 2.3% in 2010 to 0.2% in 2019. For the highest income taxpayers, those with income of $10 million or more, the audit rate dropped from 21.2% in 2019 to just 3.9% in 2019 (an 81% drop).
Here’s a look at how much audit rates are declining:
Audits rates are on the decline.
GAO
Table 3 in the report, Trends of IRS Audit Rates and Results for Individual Taxpayers by Income, has more detailed numbers.
The drop in audits is good news for tax cheats and bad news for the rest of us—and the Treasury. Taxpayers are more likely to voluntarily comply with tax laws if they think they might be audited.
How much is at stake? The IRS estimated that individual taxpayers underreported their income tax on average by $245 billion each year for tax years 2011 to 2013. This underreporting by individuals is the largest component of the tax gap—the difference between the amount of taxes owed and taxes paid timely and voluntarily.
What’s behind the audit drop? IRS staffing shortages due to attrition and decreased funding. Since fiscal year 2011, the number of tax examiners who work basic audits, usually by mail, decreased by 18%, and the number of revenue agents who work on complex in-the-field audits decreased by more than 40%. Looming retirements mean more departures. About 14% of current tax examiners and 16% of current revenue agents are expected to retire in the next three years. Another factor: audits are taking longer as they’re transferred from departing staff to others to complete.
As a general rule, the IRS audited higher-income taxpayers at higher rates than lower-income taxpayers. The exception: taxpayers claiming the Earned Income Tax Credit, a refundable credit for low- and moderate-income working individuals and families, were audited at a higher rate (.77%) than the average audit rate (.25%). The EITC audit rate was higher than the audit rate for taxpayers with incomes of $500,000 to $1 million (0.53%), but lower than the rate for those with incomes of $1 million to $5 million (1.02%). EITC audits are usually done by mail; the National Taxpayer Advocate explains how to handle an EITC audit and get your refund faster.
Here’s a look at audit rates by income for 2019:
Generally, audit rates climb as income goes up.
GAO
The IRS response to the GAO report decries that “millions” do not accurately report and pay their tax liabilities, noting that the audit process helps ensure fairness. With increased funding, the IRS says it could replace auditors lost to attrition and tackle the tax gap.