IRS Says Fewer Audits Add Up to $3 Billion Revenue Loss

The words “tax audit” are enough to send shivers down anyone’s spine but this year, taxpayers have less to worry about. Thanks to budget cuts, the number of returns selected for an audit has declined sharply in recent years. According to the most recent IRS fiscal report, approximately 1.4 million people were audited in 2013, a drop of 5% over 2012 figures and the lowest number of audits since 2008. See the IRS Data Book for 2014.

Testifying before a congressional panel earlier this month, IRS Commissioner John Koskinen estimated that there would be 100,000 fewer audits for the 2014 fiscal year and said that enforcement programs “will operate well below historical levels.” Koskinen also said that there would be “similar declines in audits of high-wealth individuals, businesses and partnerships, along with an estimated 190,000 fewer collection activities.”

While fewer audits mean good news for taxpayers, the outlook for the federal government isn’t quite so rosy. The IRS chief warned members of the House subcommittee that the government stands to lose an estimated $3 billion in revenue as a result of the cuts.

One of the organizations that have been affected the most by government budget cuts has been the IRS itself. Since 2010, the agency has seen its budget reduced by nearly $1 billion. For the 2014 fiscal year, the IRS will receive an $11.3 billion piece of the budget pie but that’s still nearly $2 billion less than what was originally requested and a $526 million deficit from last year.

Since 2010, the IRS has cut almost 10,000 permanent full-time employees from the books. In 2013, the agency was closed for five days during the government sequester and thousands of workers were furloughed without pay. These measures were undertaken in an attempt to minimize budgetary strains but the result has put even more strain on the IRS, which was already struggling to keep up with its workload.

The cuts have also made it more difficult for the IRS to provide taxpayers with answers to their tax questions. Wait times at taxpayer assistance centers and on the IRS help line have become frustratingly long simply because there are not enough employees to handle the volume of visits and calls.

Audit rates are already low for the majority of taxpayers, particularly those earning less than $100,000. For 2013, just 0.6% of taxpayers earning an adjusted gross income of $50,000 to $75,000 were audited. The rate increased slightly to 0.77% for those earning between $100,000 and $200,000.

Higher-earning taxpayers may find themselves somewhat more likely to face an audit. The audit rate for those earning between $200,000 and $500,000 was 2.06% for the 2013 fiscal year. For those with an adjusted gross income ranging from $500,000 to $1 million, the rate was 3.79%. The rate nearly tripled to 9.02% for taxpayers earning between $1 million and $5 million and soared to 16% for those with incomes ranging from $5 million to $10 million. The audit rate topped 24% for taxpayers boasting income of more than $10 million.

The audit rate for businesses with assets of less than $10 million was around 0.95%. Audits were far more frequent for corporations with assets over $10 million, with 15.84% of returns targeted for closer examination. For partnerships and S corporations the audit rate was lowest at just 0.42%.

In his testimony, Koskinen said that the tightening of the IRS’ budget in recent years held “negative implications for taxpayers and the tax system.” He said that increasing IRS funding would make it easier to hire additional revenue agents, reducing some of the agency’s challenges. For the time being, however, it appears that taxpayers can breathe a sigh of relief when it comes to audit fears.