Title: Who Gets Audited by IRS the Most and How Have Audit Rates
Changed? 

Description: IRS estimates that individual taxpayers underreport their
income during tax season by hundreds of billions of dollars each year.
The IRS determines whether taxpayers have reported their income
accurately by auditing them. But in recent years audit rates have
declined. Why has this happened and what impacts could it have? We find
out from GAO's Jay McTigue.

Related GAO Work: GAO-22-104960, Tax Compliance: Trends of IRS Audit
Rates and Results for Individual Taxpayers by Income

Released: May 2022

[Music]

[Jay McTigue:] If audit rates continue to decline taxpayers may begin
losing confidence in our tax system.

[Holly Hobbs:] Hi and welcome to GAO's Watchdog Report, your source for
news and information from the U.S. Government Accountability Office-- I'm
your host, Holly Hobbs. The IRS estimates that individual taxpayers
underreport their income during tax season by hundreds of billions of
dollars each year. The IRS determines whether taxpayers have reported
their income accurately by auditing them. But in recent years audit
rates have declined. Why has this happened, and what impacts could it
have? Today, we'll talk with GAO Director Jay McTigue, an expert on tax
policy, about a new report on trends in IRS audit rates? Thanks for
joining us!

[Jay McTigue:] Glad to be here, Holly. Thank you. 

[Holly Hobbs:] So Jay, maybe we can start with a basic question--why
would someone get audited by the IRS? What might trigger an audit? 

[Jay McTigue:] That's a great question. And honestly, anyone can be
audited by the IRS at any time. [X] Typically, IRS uses computer
algorithms and models that are based on historical characteristics of
noncompliance and patterns that they have seen over the years. They have
a tremendous amount of data on taxpayers, both through tax returns as
well as through information returns that employers and banks send to the
IRS and to taxpayers to help them comply with their tax liability. In
addition to the automated processes. IRS also conducts research on
emerging issues of noncompliance and uses data analytics to identify
groups of like returns that have characteristics that suggest potential
noncompliance. And lastly, IRS also selects taxpayers at random for
research purposes. So there are a lot of different ways IRS selects
taxpayers for audit. And, you know, I'd like to point out up front that
audits are a very important part of our tax system. They're one of the
key tools that IRS has to ensure compliance with our tax laws and to
kind of assure that everyone is paying their fair share of taxes. Our
tax system of voluntary compliance rests on the belief that taxpayers
will more likely comply if they think IRS might check.  

[Holly Hobbs:] And what do we know about the folks who get audited? Do
they have anything in common? 

[Jay McTigue:] Essentially anyone can be chosen for audit. IRS tries to
maintain a level of audit presence across all different types of
taxpayers and income levels to try to ensure that everyone is paying
their fair share and build confidence in the tax system. What we did see
however is that, since about 2010, audit rates of individual tax returns
has decreased across all income levels. But we also noticed that audit
rates for taxpayers with higher incomes decreased the most. 

[Holly Hobbs:] So, are people who make less money more likely to be
audited? 

[Jay McTigue:] Well, as I said, higher-income taxpayers are indeed being
audited at a higher rate than lower-income taxpayers. In fact, the
highest-income taxpayers, those making $5 million or more a year, right
now are being audited at about 2.3%. Whereas on average the audit rate
is less than 1% So there is still a focus on the higher-earning
individuals. 

[Holly Hobbs:] And do we know why the number of audits conducted has
decreased in recent years?

[Jay McTigue:] Good question. The audit rate overall has decreased in
parallel with the decrease in the IRS's budget. IRS's budget for fiscal
year 2021 was about 20% lower than it was in 2010 in real terms. So
IRS's buying power to bring staff on board and train people has really
been reduced, and that has translated directly into the audit rates.
And, we talked about audit rates decreasing at a greater rate for
higher-income individuals. Those audits are the most labor-intensive.
Returns of higher-income individuals tend to be much more complex, deal
with a lot of different tax issues. Whereas a lot of the lower-income
audits are more automated. They cost a lot less for IRS to undertake as
well. I think IRS has about 75,000 employees now, and that's at a level
of where it was about 50 years ago. And obviously, technology has
changed. I've mentioned automated processes and computer algorithms,
which IRS has leveraged quite a bit. But again, there are certain audits
that require people still to really understand the issues and work those
cases. 

[Holly Hobbs:] Did COVID have an impact on the number of audits that
were conducted? 

[Jay McTigue:] Oh, absolutely. During the height of the pandemic, like
many agencies, IRS shut down its operations temporarily. And, within a
month or so, they were moving a lot of work to be done remotely. But
that took a little bit of time to get staff transitioned. IRS also deals
with a lot of highly sensitive taxpayer information. So security and
safeguards had to, be in place to protect that information. And, you
know, for the safety of IRS employees as well as taxpayers, a lot of
what we call field audits where examiners go out and meet with taxpayers
in their offices, their homes, or bring tax papers into an IRS office--
those stopped completely for, you know, public health concerns. A t the
same time IRS experienced these declines in staffing, it was also being
tasked with ever-increasing responsibilities, such as making Economic
Impact Payments during the pandemic and paying individuals the advance
payment of the Child Tax Credit. And all of this is also on top of
implementing major changes to our tax system that Congress passed under
the Tax Cuts and Jobs Act of 2017 and other changes that occur every
year in the tax code. So IRS has had increasing responsibilities that it
needs to accomplish with fewer and fewer staff resources. 

[Music]

[Holly Hobbs:] So it sounds like IRS faces a number of
challenges--including budget decreases and staffing shortages--that have
contributed to lower audit rates for all taxpayers, but in particular
taxpayers with higher incomes whose taxes are more labor intensive to
audit. So Jay, why did we look at this? Why do audit rates matter, and
what's the impact? 

[Jay McTigue:] Great question. Audits are a very important tool that IRS
has at its disposal to ensure voluntary compliance. Taxpayers, when they
see audits being conducted, they're more inclined to pay their taxes,
file their taxes, because they know IRS is out there. As audit rates
decline, there is the concern that taxpayers will notice that. And
according to the latest estimates from IRS, individual taxpayers
underreported their income tax on average by about $245 billion
annually. And that's a lot of money, when we're faced with large budget
deficits. Some people have also raised concerns about whether IRS is
selecting taxpayers for audit in an equitable manner. As we talked
about, audit rates for lower-income taxpayers have seen a smaller
decline than audit rates for higher-income taxpayers. But as we've
discussed, overall, the trend is toward fewer audits across the board,
regardless of income. 

[Holly Hobbs:] And last question: What's the bottom line of this report? 

[Jay McTigue:] Historically, the rate of voluntary compliance has been
pretty flat. But if audit rates continue to decline, taxpayers may begin
losing confidence in our tax system.  As the Congress begins reinvesting
in IRS, we will continue to look at how IRS leverages its budget
resources to address these trends and help taxpayers meet their tax
responsibilities to ensure that everyone is paying their fair share. 

[Holly Hobbs:] That was Jay McTigue, talking about GAO's recent review
of trends in the IRS's audit rates. Thanks for your time, Jay. 

[Jay McTigue:] Thanks, Holly.

[Holly Hobbs:] And thank you for listening to the Watchdog Report. To
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For more from the congressional watchdog, the U.S. Government
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