The Internal Revenue Service has been increasing its tax audits of the lowest-income wage earners to keep its overall audit numbers from declining, according to a new report.
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The IRS has come under pressure to increase its audit rates, despite budget constraints and limited staff during the pandemic, but advocates have mostly been urging the agency to step up audits of the wealthy and large corporations. Instead, the research from TRAC found that even taxpayers with income between $200,000 and $1 million had much lower odds of being audited compared with workers earning less than $25,000, including those who qualified for the Earned Income Tax Credit.
Of the more than 160 million individual income tax returns filed in fiscal year 2021, the IRS audited 659,003, or only four out of every 1,000 returns filed (0.4%). That was just slightly lower than the overall odds of being audited during fiscal year 2019, and above FY 2020 levels when just three out of every 1,000 returns filed were examined. Audit rates in general have been dropping for many years, TRAC pointed out.
“IRS accomplished over 650,000 audits last year by jacking up its already high reliance on so-called ‘correspondence audits’ — essentially a letter from the IRS asking for documentation on a specific line item on a return,” said TRAC. “All but 100,000 of the 659,000 audits were conducted with these letters through the mail. Correspondence audits during FY 2021 rose to 85% of all IRS tax audits —- up from roughly 80 percent during the previous two years.”
The IRS did not respond to a request for comment.
The IRS targeted over half of its correspondence audits at the small percentage of workers at the lowest end of the income scale, according to the research. “This unfortunate situation is not new,” said TRAC. “History is just repeating itself.” Over 20 years ago, TRAC similarly reported that “low income taxpayers now stand a greater chance of being audited than higher-income taxpayers.”
Budget cuts have led to a decline in many different IRS efforts, including tax audits. Since the end of fiscal 2010, the number of IRS revenue agents has fallen 41%. “The unavailability of experienced revenue agents means that complex tax returns often go unexamined,” said TRAC. “Yet these are the targets where experts believe the largest amount of tax revenue is escaping detection and collection. The end result is that [the] IRS targets low-income taxpayers because they are simply easier to audit while those with high incomes escape any examination.”
