A new report from the Transactional Records Access Clearinghouse (TRAC) makes some provocative observations about IRS auditing in recent years. According to the report, the odds of a millionaire being audited in person by an IRS agent in the fiscal year 2022 was just 1.1%.
The IRS says that the audit rate was 2.8% for millionaires, but that depends upon what is meant by the term “audit.” The Service includes “correspondence audits” in its figures and letters that ask a taxpayer for more information. Such letters are quickly and efficiently generated, but TRAC discounts those inquiries as not providing meaningful oversight of tax returns.
That the rate of auditing has dropped is not in dispute. In 2012 there were 40,965 audits of taxpayers with $1 million or more of income, and those were all by revenue agents. In 2022 the revenue agents audited 7,210 millionaire tax returns and roughly an equal number of correspondence audits. This is despite the fact that there are more millionaire tax filers than ever.
What the report needs to discuss is what the audits turned up. Most millionaires use professional tax preparers who are likely to avoid risking their livelihoods with fraudulent returns and who are diligent in being accurate in their work. How much additional tax revenue was obtained per audit? How much time was needed for the audit compared to added taxes and penalties? Is this a good use for scarce resources when the IRS is tasked with other responsibilities?
At the other end of the income spectrum, the report observes a relatively high audit rate of those who claim the earned income tax credit, running at 12.7%. Nearly all of these (97%) are correspondent audits asking for information to verify the tax credit claim. According to the report, such audits have a good chance of increasing tax revenue because the taxpayer loses the credit entirely if the request for information goes unanswered. Unfortunately, the earned income tax credit can be complicated to compute and document, and the lower income taxpayers may need access to the necessary resources. The IRS is not much help because so few callers have been able to get through in recent years.
Audit rate issues may become prominent in the news this year because the IRS received a significant funding boost in the Inflation Reduction Act. An amendment to ban using the increased funding for increasing audits of taxpayers with less than $400,000 of income was defeated, so audit rates for everyone are expected to rise.
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