Fewer than two out of every 100 taxpayers reporting over $1 million in income were audited by the Internal Revenue Service in fiscal year 2020, according to a new report.
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The report comes at a time when the U.S. is confronting growing concerns about income inequality, especially in the midst of the financial hardship caused by the COVID-19 pandemic. During a congressional hearing Thursday on the status of this year’s tax-filing season, IRS Commissioner Chuck Rettig was asked by lawmakers on the House Ways and Means Oversight Subcommittee about IRS audit rates and whether increased enforcement could help the IRS with its perennial budget woes.
The TRAC report argues that the government is allowing billions of dollars in tax revenue to “slip through its fingers” due to budget and staffing cuts at the IRS that have left it unable to effectively audit the 637,212 millionaires living in the U.S.
“Over the past decade, Congress has imposed severe funding and staffing cuts at the Internal Revenue Service, cuts that have seriously undermined the agency's ability to administer tax laws in a fair and effective manner,” said the TRAC report. “At the same time, Congress has handed the IRS new responsibilities, including coping with major changes to the tax law and sending out repeated rounds of stimulus payments to millions of taxpayers. The latest round of $1,400 stimulus checks is just going out now while the IRS is busy with the current tax filing season.”
To be sure, in recent years, Congress has increased funding to the IRS to implement stimulus packages, the Tax Cuts and Jobs Act and the Taxpayer First Act. But before that, the IRS faced a series of budget cuts after a scandal erupted in 2013 over the agency’s apparent targeting of conservative groups. Some of the biggest budget cuts in the past decade have reduced the number of IRS revenue agents, which undermines the IRS’s auditing work, because revenue agents are the only auditors who are supposed to examine complex tax returns. Complicated tax returns from both individuals and businesses are typically the kinds that could yield the most tax revenue on audit, and fewer revenue agents at the IRS translates into fewer audits of wealthy tax filers and large companies.
Criticism has been growing over the low rate of tax enforcement for millionaires and billionaires, in contrast to the examination rate for lower-income taxpayers who claim the Earned Income Tax Credit, whose audits are usually easier to do since they typically depend more on wage income as opposed to investment income.
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Back in fiscal 2012, audits of millionaires identified $4.8 billion in unreported taxes. Now with less than one-third the number of audits, the IRS uncovered only $1.2 billion in unreported taxes in FY 2020, based on internal agency documents obtained under court order. With 98 percent of millionaires escaping extra scrutiny, fewer audits probably means many millionaires avoided paying billions of dollars to the U.S. Treasury.
The same pattern held on the corporate tax side. Nearly two out of every three of the 755 biggest corporations in the country — those with $20 billion-plus in assets — weren’t audited last year. As recently as 2012, close to all those returns (93 percent) were being examined by IRS auditors.
The IRS’s 2012 audits of corporate giants turned up $10 billion in unreported taxes, but that has dropped by more than half to only $4.1 billion in fiscal 2020. The dollar differential is even more if the focus expands to corporations reporting over $250 million in assets. Audits of those large corporations in FY 2012 turned up $24.4 billion in unreported taxes — a number that plunged to just $5.4 billion in FY 2020.
