IRS audits more poor taxpayers because it's easier, cheaper than targeting the rich
Instead of going after the wealthy, the IRS has been under fire for targeting lower-income taxpayers with audits – which the agency now says is partially because it is easier and can be accomplished by less-skilled employees.
When questioned by Oregon Democrat Sen. Ron Wyden as to why a large proportion of lower-income taxpayers were being audited, IRS commissioner Charles Rettig admitted it is a much easier and less costly task when compared with auditing higher-income tax returns.
Correspondence audits, which are often used to look into low-income people claiming the Earned Income Tax Credit (EITC), cost just $150.
“EITC correspondence audits are the most efficient use of available IRS examination resources with the average time to complete the audit of 5 hours per return,” Rettig explained in a letter.
By comparison, the time it takes to complete an audit for a taxpayer with an adjusted gross income of $10 million or more is 61 hours to 251 hours, per return.
Further, due to the required degree of employee experience and skill set, the IRS said it cannot “simply shift examination resources” from the simpler audits to the more complex ones. There is also a higher turnover rate among these more-experienced auditors, who generally have "substantial accounting skills," among other qualifications.
In order to audit more high-income returns, the agency says it would need more funding from Congress, which would allow it to have “appropriately balanced coverage across all income levels.”
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The Earned Income Tax Credit (EITC) aims to subsidize working families with low-to-moderate incomes – who generally receive a credit equal to a percentage of their earnings up to a certain maximum amount. Low-income Americans claiming the EITC were twice as likely to be audited by the IRS than those with incomes between $200,000 and $500,000.
About 300,000 EITC returns are audited per year, according to the IRS.
As previously reported by FOX Business, the IRS audited 0.59 percent of individual tax returns, or about 892,000 returns in fiscal 2018 – fewer than the year prior when audits were at their lowest level since 2002. Rates for high-income earners (with adjusted gross income exceeding $10 million) fell to 6.66 percent, from more than 14 percent the year prior. That is the lowest level since at least 2008, when the tax agency began reporting the data.
There was also a drop in audits for people with incomes between $1 million and $5 million, as well as $100,000 and $200,000.
IRS Commissioner Charles Rettig said in testimony before lawmakers in April that he wants to work with Congress to focus audits on wealthier taxpayers. To do that, the agency would take a stronger look at issues and trends among higher-income returns, including pass-through examinations. He added that pass-through audits could be streamlined, and different questions could be asked.
According to Rettig, complications related to the EITC arise because of the definition of what constitutes a qualifying child. Children must meet certain relation, age, residency and other requirements in order to qualify.
He referred to the tax credit as a “very complex part of the internal revenue code.”
The result, the IRS head said, is that about 25 percent of claims are audited, which still results in a net overpayment of more than $18 billion.
As noted by the IRS, it is combating a decline in resources. The agency’s budget fell by about $2.6 billion between fiscal 2011 through 2019. Its 2019 budget is smaller than its fiscal 2000 budget when inflation is factored in, the Government Accountability Office (GAO) wrote in a report. At the same time, staffing has been reduced by more than 20 percent over the same time period.
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The IRS added that because it has experienced “significant attrition in resources since 2010” – including a 26 percent loss across its tax examiner, tax compliance officer and revenue agent positions – audits, on the whole, have declined across all income levels.