Internal Revenue Service headquarters in Washington, D.C.
Andrew Harrer | Bloomberg | Getty Images
The richest Americans are checking their taxes at a much lower rate than they were more than a decade ago, in large part because of staffing and funding shortages at the Internal Revenue Service, according to a new report.
The audit rate for Americans making 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 about 1 in 50 highly paid workers were audited in 2019, compared to about 1 in 6 in 2010.
The decline in auditing, especially among the wealthy, has become a hot political issue in Washington. The report estimated that taxpayers underreported their income tax by a total of $245 billion a year between 2011 and 2013 and states that “Taxpayers are more likely to voluntarily comply with tax laws if they believe their return may be verified.”
The main reason for the decline, according to the report, is the lack of IRS funding. In fiscal year 2021, the agency’s budget was $11.9 billion, $200 million less than its 2010 budget.
The IRS also saw its staffing level drop to the same level as in 1973, despite millions of returns and additional assignments to be processed. In March, the IRS said it plans to hire 10,000 workers to deal with a backlog of 20 million backlogs of tax returns.
President Joe Biden and Democrats in Congress have proposed investing $80 billion in new technology and increasing the number of auditors at the IRS to increase tax collections 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 inefficiencies.
The cuts in funding and auditors mean that taxpayers, and especially the highest paid, are much less likely to be found underpaid in taxes than they were a decade ago. Overall audit rates for US taxpayers fell to 0.2% in 2019 from 0.9% in 2010.
The rich are still being tested at a higher rate than ordinary taxpayers. However, their audit scores declined at a much higher rate. The audit rate for taxpayers earning between $5 million and $10 million dropped to 1.4% from 13.5%.
For those earning over $10 million, the audit rate fell to 3.9% in 2019 from 21.2% in 2010, while the audit rate for those earning over $10 million rose slightly in 2017 and 2018 tax years due to the mandate of the Ministry of Finance to conduct an audit. rates of at least 8% for those earning $10 million or more.
“This is further evidence of the impact of two decades of IRS budget cuts,” said Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center at the Urban Institute. He added that given the shortage of staff and backlogs from the IRS during the pandemic, “I suspect 2020 has been a lot worse.”