NICHOLAS KAMM/AFP via Getty Images The Internal Revenue Service is scrutinizing fewer and fewer individual tax returns as audit rates continue to decline from a high point 10 years ago.
IRS auditors looked into a mere 0.45% of individual tax returns in fiscal year 2019, below its own target to audit 0.5% of returns, according to IRS figures released Monday. The IRS 2019 fiscal year stretched from Oct. 1, 2018 to Sept. 2019, covering the first tax season under the Trump administration’s overhauled personal and corporate tax code.
The audit rate has been falling since the start of the last decade. In fiscal years 2010 and 2011, the tax collection agency audited 1.1% of individual tax returns.
The agency has been hobbled by fewer staffers over the years, losing almost 30,000 full-time positions between fiscal years 2010 and 2019. “These loses directly correlate with a steady decline in the number of individual audits during the past nine years,” said the agency report.
The plummeting audit rate is a missed opportunity to rake in more money, according to research published in November from former Treasury Secretary Lawrence Summers, a high-profile economist who served in two Democratic presidential administrations.
The federal government could have $535 billion more in its coffers in the coming decade if the Internal Revenue Serviceaudited returns as often as it did back in 2011 — when audit rates were higher than they are now — and focused those audits on millionaires and billionaires, Summers said.
Under-reporting is more than five times as high for individuals who earn $10 million or more annual than it is for those who make under $200,000 a year.
High-net-worth returns may take more time to review, but they are well worth the time investment, according to the research. “Under-reporting is more than five times as high for individuals who earn $10 million or more annual than it is for those who make under $200,000 a year,” Summers wrote in his research.
Under-reporting is when taxpayers intentionally report less income than they actually have. It’s one of the problems that leads to uncollected taxes, which is projected to cost the government about $630 billion in 2020, according to research by Summers.
In 2011, the IRS peaked with an audit rate of 1.1% for all individual returns and fell to 0.5% in 2018, according to Summers, the onetime Treasury Department secretary in the Clinton administration and director of the White House National Economic Council in the Obama administration.
Returning to 2011 audit rates would mean approximately 131,000 more audits on individual tax returns, said Summers, now a professor at Harvard University, where he was once president.
Summers wrote the study with University of Pennsylvania law professor Natasha Sarin.
Others argue IRS audit policies need a hard look because they already disproportionately go after low-income taxpayers.
Speaking on Summers’ research, a Treasury Department spokesman said, “the administration agrees that reducing the tax gap in an important goal” and urged Congress to enact its proposed in its Fiscal Year 2020 budget.
The proposed IRS budget contained various ways to boost tax revenue, including proposals to clarify worker classifications and reporting requirements, extend IRS oversight of tax preparers and give it power to correct more tax return errors and tighten taxpayer compliance. Those provisions alone could raise roughly another $20 billion in revenue, according to the Treasury Department.
The proposed budget called the IRS “one of the most cost-effective investments in the federal government and one of the most efficient tax administrators in the world,” noting the agency collected $3.5 trillion in tax revenue in Fiscal Year 2018.
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At a time when Democratic presidential candidates like Sen. Elizabeth Warren and Sen. Bernie Sanders are calling for wealth taxes on the super-rich, Summers’s research focused on the money that the government leaves on the table right now.
Altogether, the feds could take in more than $1.1 trillion in tax revenue using the paper’s proposals, which included more audits on the highest end of the income ladder and other measures, Summers and Sarin argued in their paper.
There’s a difference though between ideas on papers and politics in action — especially on Capitol Hill. After all, President Donald Trump’s impeachment inquiry is roiling an already-divided Congress. Meanwhile, a 2017 tax code overhaul passed without a single Democratic vote.
But Summers told MarketWatch his call for more audits and other reforms could be achieved.
“It’s the easiest lift to raise a trillion dollars there is, because all it requires is a change in budget score-keeping rules, which are made by political leaders,” he said. On both sides of the aisle, “almost everyone’s vision for America requires new tax revenue, whether it’s to finance tax cuts or public investments or deficits reductions.”
As for the possibility of more taxes on the wealthy, Summers said, “This may not be where the tax discussion should end, but it’s where it should begin.”
The IRS will collect an estimated $630 billion less than is due in 2020. Between 2020 and 2029, it will collect $7.5 trillion less than it’s owed, the study estimated.
The IRS will collect an estimated $630 billion less than is due in 2020. Between 2020 and 2029, it will collect $7.5 trillion less than it’s owed, the study estimated.
The paper also examined the consequences of a shrinking IRS staff. The organization had 73,519 full-time equivalent positions in 2018, down 15.5% from 2013, statistics show.
“Today, the IRS has fewer auditors than it had at any point since World War II,” the researchers wrote.
Slim staff at the IRS could continue to be an issue. In its report Monday, the agency said it was bracing for up to 31% of its current workforce to retire in the next five years.
That would be almost 20,000 full-time employees, and the large scale exit would create “a significant risk of a large knowledge and experience gap for the nation’s tax agency,” the report said. The IRS said in the report it has changed its hiring policies in an effort to bring on new staff.
More audits for the wealthy are the best way to address tax underpayments going forward, Summers and Sarin said. Combined with bringing audits for filers like businesses and estates back to 2011 rates, enhanced enforcements could yield $715 billion between 2020 and 2029, according to their paper.
The IRS could claw another $450 billion in that time by increasing its investment in computer analysis of tax returns and increasing certain reporting requirements, they said.
This story was published on Nov. 18 and updated on Jan. 7, 2020.
