What feeling do you have when you hear IRS? Is there a sick feeling in the pit of your stomach or do you just roll your eyes knowing that April 15th will be here all too quickly? Throw in the word audit and emotions and blood pressure can reach levels you never dreamed of.
Most taxpayers envision Internal Revenue Service audits as intrusive investigations resulting in criminal sentences. Today, nothing could be farther than the truth: The IRS’s auditing power has been greatly diminished in the past decade. IRS audit resources have been reduced by 28 percent in the last decade and the audit rate has dropped from 0.9 percent in 2010 to 0.5 percent in 2018. In fact, the number of IRS audits in 2018 (991,168) dropped by almost half compared to 2010 (1.735 million).
Since 2010, the IRS has been tasked with doing more with less resources, but the reality is that the IRS cannot do more audits with less resources. The IRS audit data reveals 10 trends from the past decade that have become the new realities for current state of IRS audits.
1. Most audits are done by mail
This trend started with IRS reforms in the late 1990s. In 1998, just before IRS reforms, the service audited 47 percent of taxpayers by mail. In the past decade, IRS data shows that the service prefers the less-intrusive mail audit. Today, three out of four audits of individual taxpayers are done by mail — a ratio that has held since 2010. These audits usually challenge small amounts of credits or deductions on a return, and require only a mail response, with documentation, to an IRS central campus location.
2. The main issue in audits: The EITC
Fifty percent of all individual audits involve a taxpayer who is claiming the Earned Income Tax Credit. IRS efforts to curb EITC errors largely rely on audits to hold a questionable EITC claim on a return. Politicians have criticized the IRS in the past for picking on low-income taxpayers, and the EITC audit rate is their main evidence. Compared to other taxpayer profiles, the IRS clearly has the propensity to address the EITC taxpayer more than other issues, even the small-business individual taxpayers. (See below for the trend on high wealth audits.)
3. An alarming amount of people do not respond to an audit
There is linkage here to the EITC mail audit. The Taxpayer Advocate reports that almost two-thirds of all mail audits go without response or are assessed by taxpayer default. That is, the IRS just assesses the additional tax without the taxpayer contesting the service’s determination. Only one in five taxpayers agree to their mail audit adjustment — and likely, from the data, they don’t understand how to appeal. This mess leads to many audit reconsiderations (i.e., an audit “re-do” request). Again, more question marks here for the targets of mail audits — the low-income population.
4. The most common IRS challenge to a return is not an audit