The thought of getting audited by the IRS ranks pretty high on the list of concerns of many Americans. But the reality is that audits — especially in-person examinations — are extremely rare.
According to the most recent IRS data available, audit rates for most Americans in tax year 2019 were a fraction of a percent. For those with incomes between $25,000 and $500,000 — the vast majority of Americans — audit rates were a scant 0.2%.
Part of the reason for this is that the agency is simply lacking enough staff, particularly thanks to recent budget cuts. But does the size of the IRS really matter for your taxes?
Also find out 10 tax deductions you should know for 2023.
When Was the IRS Trimmed Down?
The Trump Administration made big headlines when it announced a $239 million budget cut for the IRS in its 2018 budget. The IRS had been saying for years that it was underfunded, understaffed and incapable of effectively carrying out its mandate, so the budget cut was a major punch in the gut for the agency. After all, the IRS budget had already been cut by 18% from 2010 to 2017 — 21% with the 2018 budget cuts — and over that time period, it also had lost about 13,000 employees, or roughly 14% of its workforce.
The neglect the federal government seems to show to the IRS is puzzling on the surface, as it is essentially a revenue-gathering arm for a country that struggles with massive deficits. The IRS will fail to collect nearly $7.5 trillion in taxes owed between 2020 and 2029, according to a 2020 study by former Treasury Secretary Lawrence Summers and University of Pennsylvania law Prof. Natasha Sarin.
Although collecting that money would seem to work wonders for the federal government’s budget, IRS funding is a political hot-button issue that has other factors working against it.
What Does a Smaller IRS Mean for Taxpayers?
Regardless of your stance on IRS funding, what’s really relevant for all Americans is how it affects their personal finances. On the downside, having fewer staffers at work and less money to operate can result in frustration for taxpayers. Here are some of the major consequences of the funding shortage, according to the IRS:
- Millions of taxpayer phone calls will go unanswered
- Taxpayer correspondence will not be processed in a timely manner
- The amount of owed taxes not collected will stand at $400 billion per year
- Many Americans will feel the tax code is enforced unfairly, as the IRS will have to pick and choose whom it examines
The lack of personnel to perform the most basic task of answering the phone is probably the most glaring example of how an underfunded IRS hurts taxpayers. IRS data indicates that of the 282 million phone calls the agency received in 2021, just 11% were actually answered — a truly staggering statistic.
Of course, some may view an underfunded IRS as a blessing. If there are fewer IRS agents working, the already low audit rates are likely to go down even further.
Who Does a Smaller IRS Benefit Most (and Least)?
Generally speaking, a smaller IRS benefits those who have the most to lose — namely, wealthy taxpayers. According to the Center on Budget and Policy Priorities, the audit rate for millionaires dropped by a whopping 61% from 2010 to 2018. Things were even rosier for those making at least $5 million, as they saw their audit rate drop by an incredible 87%.
Perhaps counterintuitively, Americans on the lower end of the earning spectrum are the ones who seem to suffer the most from an underfunded IRS. Those claiming the Earned Income Tax Credit, for example, are generally lower-income Americans with dependent children. Yet, IRS data from 2018 shows that those claiming the EITC were audited 10 times more often than people in the upper income brackets — 0.60% vs. 0.06%.
Wealthier Americans are able to access more complicated tax shelters and can hire high-level tax strategists and attorneys that make collecting their tax liability more difficult. Lower-earning Americans, on the other hand, typically have simpler tax returns and make easy targets for improperly claimed tax credits like the Earned Income Tax Credit.
Did Biden Restore IRS Funding?
The Biden Administration approved additional funding at the end of 2022 via the Inflation Reduction Act, which set aside an incredible $80 billion for the agency. The money was meant to be spent on modernizing technology, hiring additional enforcement agents, improving customer service and increasing the audit rate on the wealthiest Americans.
However, politics being as it is, this Christmas present for the IRS appears to have vanished in the wind. The first bill passed by the Republican-controlled House of Representatives in 2023 rescinded about $70 billion of the $80 billion approved for the IRS. For the time being, at least, the IRS will remain in its current depleted state.
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