Is the IRS Auditing More Wealthy Taxpayers?

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The Internal Revenue Service issued a statement that it is auditing tax returns for the highest-earning taxpayers much more aggressively than it has in the past decade. Reports on IRS auditing comes amid sharp criticism from Congress over lagging audit numbers. There seems to be a disconnect between the IRS reports and the Government Accountability Office.

For years, the rate at which the IRS audits the highest earners has fallen as the agency’s funding dwindled. However, that trend has reversed according to the IRS. In a recent statement they claim, “between September of last year and May, audit rates have doubled for taxpayers in every income category above $100,000.” Audit rates for incomes between $100,000 and $500,000 have risen to 0.6%, doubling from 2019, the IRS said. Audits for taxpayers making above $10 million in one year increased fourfold, reaching 8%.

In a differing report, The Government Accountability Office states the audit rate for Americans earning more than $5 million a year plunged from 16% in 2010 to just under 2% in 2019. That means the wealthiest Americans are getting audited at a far lower rate than a decade ago.

The IRS points out that audits for high-income taxpayers or those with complicated returns usually start more than a year after the return is filed. (The law allows a tax return to be audited within three years after its filing.) For instance, returns for 2019, which taxpayers had to file by May 15, 2020 — or, with an extension, by October 15, 2020 — could be subject to an audit until 2023.

Is there reason for wealthier Americans to worry?

There is only so much the IRS can do as its funding and workforce have declined. Over the last decade, the number of revenue agents who conduct in-person audits has shrunk by 40% to just 8,300. Current staffing levels are the same as 1973 despite having millions more returns to process and additional mandates to perform.

The Treasury estimates that the amount of taxes the richest people and corporations avoid paying every year is equal to all the taxes the government collects from the bottom 90% of taxpayers. The IRS has relied more and more on audits done by mail, which are easier to do but skew toward lower-earning people. An analysis in March from the Transactional Records Access Clearinghouse at Syracuse University found that the IRS audits people earning less than $25,000 a year at five times the rate of everyone else.

While the IRS is trying to put steps in place to increase audits, the numbers still show a low percentage of wealthier taxpayers are being audited. At this time, taxpayers of all income levels should work on being clear and focused with their reporting and file electronically when possible.