GAO Reports 44 Percent Drop in Audit Rates; Biggest Decrease Applies to Wealthiest Taxpayers

(Parker Tax Publishing May 2022)

On May 17, the U.S. Government Accountability Office (GAO) issued a report to the House of Representatives which found that, in recent years, the IRS has audited a decreasing proportion of individual tax returns which was attributed to decreases in IRS audit staffing as a result of decreased funding. According to the report, the audit rate declined 44 percent between fiscal years 2015 and 2019, including a drop in the audit rate of 75 percent for individuals with incomes of $1 million or more, raising concerns about the potential for a decline in taxpayers accurately reporting their tax liability. GAO-22-104960.

Background

The U.S. House of Representatives Subcommittee on Oversight, under the Committee on Ways and Means, asked the Government Accountability Office (GAO) to report on trends in IRS individual income tax audit rates, including the number of audits; audit outcomes; and enforcement resources expended across income levels. In response, on May 17, 2022, the GAO issued the requested report. The resulting report, "TAX COMPLIANCE, Trends of IRS Audit Rates and Results for Individual Taxpayers by Income," highlights for the most recent years available, (1) audit rates by select income categories and the reasons for differences across these categories, and (2) audit outcomes and resources used for auditing individual tax returns across the income categories and likely reasons for any trends.

General Findings of the GAO Report

The GAO Report found that, from tax years 2010 to 2019, audit rates of individual income tax returns decreased for all income levels. On average, the audit rate for these returns decreased from 0.9 percent to 0.25 percent. IRS officials attributed this trend primarily to reduced staffing as a result of decreased funding. Audit rates decreased the most for taxpayers with incomes of $200,000 and above. According to IRS officials, these audits are generally more complex and require staff's review. Lower-income audits are generally more automated, allowing the IRS to continue these audits even with fewer staff.

The report noted that, although there was a higher decrease in audit rates for higher-income taxpayers, the IRS generally audited such taxpayers at higher rates compared to lower-income taxpayers. However, the audit rate for lower-income taxpayers claiming the earned income tax credit (EITC) was higher than average. According to IRS officials, EITC audits require relatively few resources and prevent ineligible taxpayers from receiving the EITC.

From fiscal years 2010 to 2021, the report showed that the majority of the additional taxes the IRS recommended from audits came from taxpayers with incomes below $200,000. However, the additional taxes recommended per audit increased as taxpayer income increased. Over this time, the average number of hours spent per audit was generally stable for lower-income taxpayers but more than doubled for those with incomes of $200,000 and above. According to IRS officials, greater complexity of higher-income audits and increased case transfers due to auditor attrition contributed to the time increase.

The report stated that audits of the lowest-income taxpayers, particularly those claiming the EITC, resulted in higher amounts of recommended additional tax per audit hour compared to all income groups except for the highest-income taxpayers. IRS officials explained that EITC audits are primarily pre-refund audits and are conducted through correspondence, requiring less time. Also, the report noted, lower-income audits tend to have a higher rate of change to taxes owed.

IRS Notes Decreasing Appropriations in Response to Draft Report

A draft of the report was provided to the IRS Commissioner for comment. The IRS agreed with the report's findings, but suggested that analyzing data by audit type or identification method may yield additional insights. The IRS noted that auditing tax returns requires auditors to properly respond to taxpayers with increasingly complex business and investment activities. Greater complexity, the IRS said, requires greater IRS sophistication and skill as well as applying more time to perform the necessary review of information and to properly apply the law. The IRS observed that it has lost numerous personnel due to attrition, including those with the most sophisticated skills, and has been unable to replace them due to shrinking appropriations.

The IRS noted that appropriations from Congress have not kept pace with population and economic growth for decades. Current staffing, the IRS observed, is nearly identical to the level of staffing for the IRS in 1973. The reduction in personnel, the IRS said, has resulted in challenges to overall tax administration, including the IRS's ability to deliver adequate customer service, audit coverage, collecting on taxes owed, closing the tax gap, and IT modernization.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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