The IRS has been increasing its audits and examinations of high-income individuals in the past year, examining nearly 30 percent of the tax returns of those earning $10 million and more, nearly twice the rate of a year earlier.
“Overall, in FY 2011, individual income tax returns in higher AGI classes were more likely to be examined compared to returns in lower AGI classes,” the IRS said in its FY 2011 Data Book, which the IRS released Thursday. For the IRS, fiscal year 2011 covers the period between Oct. 1, 2010 and Sept. 30, 2011.
Last year, the IRS examined 29.93 percent of individual income tax returns, compared to about 18 percent the previous year, according to CNN Money. Taxpayers with incomes between $5 million and $10 million were examined at a rate of 20.75 percent, compared to about 12 percent in fiscal year 2010. Those with incomes between $1 million and $5 million were audited at a rate of 11.8 percent, compared to about 7 percent a year earlier. Overall, about 1.1 percent of taxpayers were audited in FY 2011, about the same rate as in FY 2010.
IRS Commissioner Doug Shulman warned Congress during a hearing about tax season on Thursday that if budget cuts at the agency continued, the service would be forced to cut down on its audits (see IRS Commissioner Shulman Addresses Tax Delays). The agency endured a $300 billion cut in its fiscal 2012 budget, leading to effects such as long waiting times for telephone assistance. Shulman predicted that tax compliance rates would likely go down as word spread that the audit rates were decreasing as a result of further budget cuts.
“We have budget cuts and we try to do the best we can with those budget cuts,” he said in testimony before the House Ways and Means Oversight Subcommittee. “Clearly we’re doing less exams this year, and we have to triage and find places where [we’re] doing less collection activities, and it’s going to result in less money coming in than otherwise would have come in.
"The big trend I’m worried about is, if we don’t stem the tide in the 2013 and 2014 budgets, you get to the point where there is enough news about compliance rates being so low, that still a whole lot of people are going to be paying their taxes because they’re honest, hardworking Americans and they want to pay into the society that they feel benefits them, but if people want to push the envelope, which some do, and want to cut corners, if they think we’re not on the job, then they’ll do so," he added.
"So I think the general comments about [how] you can’t have a long-term trend of degrading compliance resources because that really starts to hit voluntary compliance is accurate, and I think the specifics of less funding just means less dollars in the door. That’s simple math.”
Other significant information in the IRS FY 2011 Data Book included the fact that the IRS collected $2.4 trillion and processed more than 234 million tax returns from Oct. 1, 2010, to Sept. 30, 2011. Taxpayers electronically filed more than 133 million business and individual income tax returns, including 77 percent of all individual income tax returns. More than 119 million individual income tax returns, about 83 percent of all individual returns, resulted in tax refunds, totaling almost $338 billion. The IRS examined 1.1 percent of all individual income tax returns and 1.5 percent of corporation income tax returns (excluding S corporation returns). The IRS provided taxpayer assistance through 319 million visits to IRS.gov and assisted nearly 83 million taxpayers through its toll-free telephone helpline or at walk-in sites.
On Thursday, Shulman provided an update on the 2011 tax season so far. In his testimony, he noted that as of March 10, 2012, the IRS has received over 70 million individual returns. The IRS has issued 59.2 million refunds for a total of $174 billion, compared to 59 million refunds for a total of $178 billion over the same time period in 2011.
The average dollar refund this tax season was approximately $3,000, about the same as last year. During the same time period, the IRS directly deposited 51.3 million refunds in taxpayers’ accounts, as compared to 49.8 million last year, a 3 percent increase.
Michael Cohn writes for Accounting Today.