Superrich IRS tax audits plunge over decade, government report says

The Internal Revenue Service headquarters in Washington, D.C.

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The wealthiest Americans are getting their taxes audited at a far lower rate than they were over a decade ago, due in large part to staff and funding shortages at the Internal Revenue Service, according to a new report.

The audit rate for Americans earning more than $5 million a year plunged to just over 2% in 2019 from over 16% in 2010, according to a report from the Government Accountability Office, a federal watchdog. That means only about 1 in 50 high earners were audited in 2019, compared with about 1 in 6 in 2010.

The decline in audits, especially among the wealthy, has become a heated political issue in Washington. The report estimated that taxpayers underreported their income tax by a combined $245 billion a year between 2011 and 2013, and said that “taxpayers are more likely to voluntarily comply with the tax laws if they believe their return may be audited.”

The main reason for the decline, according to the report, is a lack of IRS funding. In fiscal year 2021, the agency’s budget was $11.9 billion — $200 million less than its 2010 budget.

The IRS also has seen its staffing levels fall to the same levels as 1973, despite having millions more returns to process and additional mandates to perform. In March, the IRS said it planned to hire 10,000 workers to tackle a backlog of 20 million unprocessed tax returns.

President Joe Biden and Democrats in Congress have proposed investing $80 billion in new technology and more auditors at the IRS to increase tax collections by $700 billion over 10 years. Republicans say the agency hasn’t provided adequate proof of the size of the “tax gap” — or amount of uncollected taxes — and has been prone to data leaks and inefficiency.

The decline in funding and auditors means that taxpayers, and especially the top earners, are far less likely to get caught underpaying their taxes than a decade ago. Overall audit rates for American taxpayers fell to 0.2% in 2019 from 0.9% in 2010.

The wealthy are still audited at a higher rate than the general taxpayer population. Yet their audit rates have declined at a much higher rate. The audit rate for taxpayers earning between $5 million and $10 million fell to 1.4% from 13.5%.

Those earning more than $10 million saw their audit rate fall to 3.9% in 2019 from 21.2% in 2010, while audit rates for $10 million-plus earners ticked up slightly for the 2017 and 2018 tax years due to a Treasury Department mandate to impose audit rates of at least 8% on those making $10 million or more.

“This is yet more evidence of the consequences of two decades of IRS budget cuts,” said Howard Gleckman, senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute. He added that given the staffing shortages and IRS backlogs during the pandemic, “I suspect 2020 was far worse.”

Source: https://www.cnbc.com/2022/05/17/super-wealthy-irs-tax-audits-plunge-over-decade-government-report-says.html