Tax Audit Rates Decrease Across the Board, Especially for Those Earning $200K+

Tax Audit Notice envelope
DNY59 / Getty Images/iStockphoto

The IRS has come under increased scrutiny during the COVID-19 pandemic for a massive backlog of unprocessed returns and mounting complaints about poor customer service. But as new government research shows, the agency’s problems predate the pandemic and include a steady decline in tax audits — especially for higher-income taxpayers.

See: Stimulus Updates To Know for Spring 2022
Find: 22 Side Gigs That Can Make You Richer Than a Full-Time Job

A study from the U.S. Government Accountability Office, released this month, found that in recent years, the audit rate declined the most for taxpayers with annual incomes of $200,000 and higher. At the same time, the IRS audited taxpayers with incomes below $25,000 at higher-than-average rates, Accounting Today reported.

During the tax years 2010 to 2019, overall audit rates of individual income tax returns decreased across all income levels. On average, the audit rate for these returns fell from 0.9% to 0.25%. 

IRS officials attributed the slowdown to reduced staffing tied to decreased funding. The reason audits of higher-income taxpayers declined more than others is that these audits “are generally more complex and require staff’s review,” the GAO said in its report. In contrast, “lower-income audits are generally more automated, allowing IRS to continue these audits even with fewer staff.”

Make Your Money Work

Although the rate of audits declined more for higher-income taxpayers than lower-income taxpayers, the IRS still audited them at higher rates compared to lower-income taxpayers. The exceptions were lower-income taxpayers who claim the Earned Income Tax Credit (EITC). These taxpayers were audited at higher-than-average rates because, as IRS officials explained to the GAO, “EITC audits require relatively few resources and prevent ineligible taxpayers from receiving the EITC.”

POLL: Have You Skipped Any of These Essential Expenses Due to Rising Prices?

As Accounting Today noted, audits of the lowest-income taxpayers — especially those who claim the EITC — resulted in higher amounts of recommended additional taxes per audit hour compared to almost all other income groups. EITC audits are mostly pre-refund audits conducted through correspondence, so they require less time than other types of audits. Lower-income audits also tend to have higher rates of change to taxes owed.

From fiscal years 2010 to 2021, most extra taxes recommended following audits came from taxpayers with annual incomes below $200,000.

Make Your Money Work

The GAO conducted the study because of concerns about underreporting of income taxes. The IRS estimates that individual taxpayers underreported their income tax on average by $245 billion each year for tax years 2011 to 2013.

“This underreporting is the largest component of the tax gap — the difference between the amount of taxes owed and taxes paid timely and voluntarily,” the GAO said.

A decline in audits has raised worries about a similar decline in taxpayer compliance. As the GAO report discovered, it has also led to concerns that lower-income taxpayers are unfairly selected for audits simply because their returns are easier and faster to audit than those of high earners.

More From GOBankingRates

About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.

Best Bank Accounts of July 2022

Untitled design (1)
Close popup The GBR Closer icon

Sending you timely financial stories that you can bank on.

Sign up for our daily newsletter for the latest financial news and trending topics.

Loading...
Please enter an email.
Please enter a valid email address.
There was an unknown error. Please try again later.

For our full Privacy Policy, click here.