It’s July 15th, and that means your tax returns are due by the end of the day. You’ve just clicked submit through the online tax tool of your choice, and you breathe a sigh of relief. That was really down to the wire, but at least you got it in within the deadline and won’t face a late-filing penalty. Now, a new worry sets in. What are your chances of getting audited?
If you’ve been following along as stimulus payments were sent out, you might have noticed that it hasn't gone smoothly: some stimulus payments were delayed, people trying to use the Get My Payment tool saw a lot of errors at first, and over $1 billion in stimulus money was sent to deceased Americans.
The IRS is struggling. And it’s not just because of COVID-19 and the task of sending out stimulus checks to millions of people; it’s been underfunded and understaffed for a while now. In a way, that may sound like good news for you — for 2019, the audit rate was 0.45% for individual taxpayers, the lowest it’s been in decades. But it’s not great if your income is low, and it’s not great if you believe the wealthy should pay their lawful share of taxes.
The New York Times reports that after a hiring freeze in 2011, when harsh IRS budget cuts began, the agency’s staff of 94,700 people shrunk to 73,600 by 2019. ProPublica’s 2018 investigation revealed in detail how a once-formidable agency feared or despised almost universally by Americans has become so comparatively toothless. In 2017, the IRS had 9,510 auditors on staff, which was just a third of how many they had in 2010. This reduction in manpower has meant that even people who don’t file taxes at all — which seems like the easiest way to get investigated by the IRS — aren’t being pursued by the agency.
The biggest beneficiaries of a weakened IRS are big corporations. They have the resources to hire the best accountants in the world who can help them weave subtle, complicated tax deceptions — and also the resources to hire the best tax attorneys in the rare case of an audit. The IRS doesn’t have the money to go after the wealthy. Between 2011 to 2018, audit rates for people making between $1 to $5 million a year dropped by 81%. For those making over $10 million, it dropped 78%. The big travesty is that the richest 1% are now getting audited at almost the same rate as low-income Americans claiming the Earned Income Tax Credit, who typically make around $20,000 a year: 1.56% and 1.41%, respectively. The IRS’ scrutiny of EITC recipients is in large part due to Republican lawmakers insisting that EITC fraud is a significant reason for the U.S. government not getting the taxes it’s owed. In 2015, Congress passed a law requiring the IRS to hold refunds for EITC recipients who file early, so that they can’t receive them before mid-February, even though it’s often EITC recipients who need their refunds soonest.
Occasionally, the IRS does still try to go after the big players. Early this year, the IRS took Facebook to court, alleging it owed around $9 billion in taxes. The ability to do this depends on a kind of snowball effect, though. If the IRS won a case against a company like Facebook, its winnings would give it the resources to go after another one. The first part of the Facebook trial ended in mid-March, and the second part was due to begin in June. That is, until COVID-19 put the brakes on it. It’s unclear when the trial will resume.
Now that Tax Day is here, the IRS is resuming its examinations of tax returns and enforcement of collections. Recently, the agency announced its commitment to auditing certain high-income taxpayers this year. While this is a good sign, if we truly want to narrow the tax gap — the hundreds of billions of dollars in owed taxes that the IRS does not receive — the IRS needs the budget to hold the wealthy and powerful accountable.