IRS Superrich Tax Audits Plunge A Decade, Government Report Says

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

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Wealthier Americans are seeing their taxes audited at a much lower rate than they were over a decade ago, largely due to Internal Revenue understaffing and funding, new report says Service.

The audit rate of Americans earning more than $5 million a year fell to just over 2% in 2019 from over 16% in 2010, according to a report by the Government Accountability Office, a federal watchdog. This means that only around 1 in 50 employees were audited in 2019, compared to around 1 in 6 in 2010.

Declining audits, especially among the wealthy, have become a hot political topic in Washington. The report estimates that taxpayers under-reported their income taxes by a total of $245 billion a year between 2011 and 2013, and said that “taxpayers are more likely to voluntarily comply with tax laws if they think their statement can be verified.”

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

The IRS also saw its workforce drop to the same levels as in 1973, despite millions of additional returns to process and additional warrants to execute. In March, the IRS announced plans to hire 10,000 workers to tackle a backlog of 20 million unprocessed tax returns.

President Joe Biden and congressional Democrats have proposed investing $80 billion in new technology and more IRS auditors to boost tax revenue by $700 billion over 10 years. Republicans say the agency failed to provide adequate evidence of the size of the “tax gap” – or the amount of uncollected taxes – and was prone to data leaks and inefficiency.

Falling funding and auditors mean that taxpayers, and especially the highest earners, are much less likely to get caught underpaying their taxes than they were a decade ago. Overall audit rates for U.S. 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 faster rate. The audit rate for taxpayers earning between $5 million and $10 million fell from 13.5% to 1.4%.

Those earning over $10 million saw their audit rate drop to 3.9% in 2019 from 21.2% in 2010, while audit rates for employees over $10 million increased slightly for the 2017 and 2018 tax years due to a Treasury Department mandate to impose an audit. rates of at least 8% on those earning $10 million or more.

“This is further evidence of the consequences of two decades of IRS budget cuts,” said Howard Gleckman, senior fellow at the Urban Institute’s Urban-Brookings Tax Policy Center. He added that given the IRS’ staffing shortages and backlogs during the pandemic, “I suspect 2020 has been a lot worse.”

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