Who Are the IRS' New Audit Targets?
(Bloomberg) -- If you’re scared of an audit by the IRS, there’s less to fear these days. New data show that budget cuts at the IRS mean the agency is investigating fewer wealthy taxpayers.
An average taxpayer’s chance of being audited has tumbled 23% in three years, in line with an IRS budget that’s dropped an inflation-adjusted 17% since 2010. Only 0.9% of individual taxpayers were audited last year, the lowest proportion in seven years.
Even in this era of IRS austerity, wealthier people still face more scrutiny than average.
If you make $200,000 to $1 million annually, your chances of an audit are around 2.2%, more than double the average. It's even higher for the extra-wealthy—people who earn more than $1 million are audited at a rate of around 7.5%.
But those rates are dropping, and precipitously. See the first chart below.
The only major group that saw an increase in their chances of an audit last year? Taxpayers living overseas. New laws and regulations on investments held overseas have made their tax filing much more difficult.
While this may help individual taxpayers relax, fewer audits mean less tax revenue, in both the short and long term.
Last year IRS audits of individuals uncovered $11.9 billion in unpaid taxes, 15% less than the year before.
Fewer audits in 2014 could also mean more cheating in future years. Academic studies show that having gone through an audit causes taxpayers to report more taxable income for years to come; the threat of another audit keeps them honest.
IRS Commissioner John Koskinen estimates that budget cuts mean the government is losing at least $2 billion in revenue per year. "It's a classic example of being penny wise and pound foolish," he said in a March 31 speech.
For now, though, a growing economy is more than making up for what the IRS is losing from lower audit rates. The IRS still managed to boost its net collections by 8% last year, to $2.7 trillion.