‘There can’t be one tax system for the rich and one for everyone else’: IRS audit rates keep dropping, especially for the wealthy
Regardless of the size of a household’s budget, the increasingly short-staffed and cash-strapped Internal Revenue Service has conducted fewer audits in recent years – but wealthy households, though ‘they typically face higher rates, experienced the greatest decrease in the likelihood of receiving verification.
In addition, a tax credit aimed at low-to-middle-income workers becomes a red flag for an above-average verification rate.
Those are the findings of a new federal government watchdog report examining IRS audits — and IRS funding levels — at a time when Democrats are keeping the volume high on long-running disputes. date, wealthy taxpayers are not paying their fair share.
Across all incomes, personal tax return audit rate fell from 0.9% to 0.25%, according to GAO report examining audit rate trends between tax year 2010 and the 2019 tax year.
“For the 2019 tax year, individuals earning up to $25,000 faced a higher verification rate (0.40%) than households earning between $25,000 and $500,000 (0.17% ).”
During this period, audit rates for taxpayers earning up to $25,000 dropped by 61%, the researchers found. For taxpayers earning between $500,000 and $5 million, this was an 87% drop. Households above the $5 million threshold saw their verification rate drop by 86%.
“Although audit rates declined more for high-income taxpayers, the IRS generally audited them at higher rates compared to low-income taxpayers,” the official said. GAO report says.
There are exceptions to this model, which provided material for debate during Wednesday’s hearing.
For the 2019 tax year, individuals earning up to $25,000 faced a higher verification rate (0.40%) than households earning between $25,000 and $500,000 (0.17% ).
“There can’t be one tax system for the rich and one for everyone else. And yet, that’s exactly what we have,” said Rep. Bill Pascrell, a Democrat from New Jersey, who heads the House Ways and Means Oversight Subcommittee. Pascrell and other lawmakers weighed in on the Government Accountability Office (GAO) report during a hearing on Capitol Hill on Wednesday.
Just over 1% of tax returns between $1 million and $5 million were audited in the 2019 tax year. For tax returns over $5 million, the audit rate was 2 .35%. In July 2020, the IRS launched a project to launch more audits for taxpayers at the top.
earned income tax credit,
Another factor impacting American workers: When taxpayers claimed the Earned Income Tax Credit, which is intended for low- and middle-income taxpayers, the audit rate jumped on those returns to 0, 77% in the 2019 tax year. Only tax returns reporting income over $1 million faced higher audit rates that year, according to the GAO report.
Audits on the EITC are easier to perform, according to the report. But it’s also complicated credit where abusive payments can occur, the report added — a point Republican lawmakers emphasized on Wednesday.
In fiscal year 2020, nearly a quarter (23.5%) of EITC payments were improper, which totaled $16 billion, the IRS estimated in the report.
The latest report “shows what we already know. There are real administrative issues around the earned income tax credit,” said Rep. Tom Rice of South Carolina, the subcommittee’s ranking Republican. Improper payments were “a huge problem and it requires audits”, he said.
“By early May, the backlog of paper returns had fallen to 1.7 million from 8.2 million at the start of the year, Ken Corbin, head of taxpayer experience at the IRS, told lawmakers on Wednesday.”
“Instead of criticizing the audit rate, let’s fix the underlying problem,” with better designed credit, said Rice, who also noted that there could be more oversight of paid tax preparers who prepare and submit EITC requests to the IRS.
The latest report comes at a time when the IRS is under intense scrutiny on many fronts after being tasked with so many pandemic relief measures, such as stimulus checks and advance payments from child tax credits. The last tax season is over, but the IRS is still processing a backlog of tax returns from last year.
By early May, the backlog of paper returns had fallen to 1.7 million from 8.2 million at the start of the year, Ken Corbin, head of taxpayer experience at the IRS, told lawmakers on Wednesday.
And then there are the challenges of enforcing tax laws. Treasury Department officials estimate that there is a $600 billion annual gap between taxes paid and taxes owed, with the top 1% responsible for more than a quarter of that gap.
““We face tough choices each year about where to deploy limited resources given the scope of our responsibilities, but our choices are guided by fair and unbiased audit plans throughout the process. “”
The IRS has pushed back against arguments that wealthy taxpayers supposedly get a free pass when it comes to audits – but agency commissioner Charles Rettig has also acknowledged that his staff can be “overwhelmed” by well-heeled taxpayers. And that’s a good reason the agency needs more funding and more staff, he and others said.
The GAO’s findings showed that “we audit a greater percentage of high-income taxpayers than low-income taxpayers despite the fact that these audits tend to be the most complex and labor-intensive,” Douglas O’Donnell, the IRS deputy commissioner for services and enforcement, said in a response to the GAO report.
“We are faced with difficult choices every year as to where to deploy limited resources given the scope of our responsibilities, but our choices are guided by fair and unbiased audit plans throughout the process” , O’Donnell later added.
The Biden administration wants the IRS to get $14.1 billion for the next fiscal year, an 18% increase from the level adopted in 2021. That would be much-needed money, Corbin said, adding “We need help.”
The administration has pushed for an $80 billion investment in the IRS over the next decade.
The IRS could be limited by the funding Congress gives it and the tax laws they write for the IRS, Pascrell said. But he added: ‘Too many decisions within the IRS involve what can be done, instead of what must be done,’ Pascrell said, calling on the Biden administration to fire Rettig before the end of his term. in November.
The IRS declined to comment.