Tax audits drop for the highest earners
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The number of audits of Americans earning more than $1 million a year has fallen sharply over the last several years, according to a new report from researchers at Syracuse University. Yet, tax evasion is far more common among higher earners.
Why it matters: The report is another sign of how the chronically underfunded IRS is "in crisis," as we reported earlier this year.
- The U.S. loses $1 trillion in unpaid taxes annually, according to a statement last spring from IRS commissioner Charles Rettig.
- The unpaid taxes are mostly a result of tax evasion by the wealthy and big companies, he said.
- Most workers pay up: Roughly 99% of taxes owed on wages are paid to the IRS, a report from the Treasury noted last year.
Details: Of 617,505 returns filed by those making over $1 million last year, about 14,000, or 2%, were audited, according to the agency’s data analyzed by the Transactional Records Access Clearinghouse at Syracuse.
- That's down from more than 40,000, or 12% of the million-plus group, in 2012.
- The million-plus audit rate should be far higher, said Susan Long, a statistician who worked on the report. “Why is it so low? That is where the big tax gap is. It’s not the little guy.”
Meanwhile: Last year, the IRS audited 1.3% of the tax returns filed by those earning less than $25,000 a year, the report finds.
- Just .45% of returns filed by those earning $200,000 to $1 million were audited.
The backstory: If you earn less than $25,000 a year, you don’t owe income taxes — you typically qualify for the Earned Income Tax Credit (EITC), a rebate that keeps millions of families out of poverty each year.
- These audits are theoretically meant to ensure no one is tricking the system.
- The Trac report says that these audits are cheaper to conduct — less experienced workers administer them largely through the mail — and therefore more common.
- Earlier reporting from ProPublica, which has covered the auditing gap for years, shows that the counties with the highest audit rates in the U.S. are "poor, rural, mostly African American and in the South."
- The EITC audits discourage poor people from getting this much needed benefit, according to one study from 2019. Once you've been audited, you're less likely to claim it, and 20% of those eligible don't.
- Filing for the EITC is needlessly complicated and those who need this money are the least likely to have an accountant or receive guidance from the IRS, as an agency watchdog recently pointed out.
The other side: The IRS says that audits of those filing for the EITC are very different from those conducted on high earners. They're done on paper, via the mail, as opposed to in-person.
- There is a 25% error rate on the EITC claims, according to a post from Sunita Lough, IRS executive, on IRS.gov sent over to Axios by the agency.
- The IRS emphasizes that audits of high earners are a different, more complex and multiyear process — and happen at a higher rate than for other groups.
- "Auditing a meaningful percentage of the highest income taxpayers is critical to maintaining public confidence in the integrity of our tax system," she said.
Editor's note: This story first published on March 10.
