IRS asks for extra cash: Are Americans more at risk of being audited?
Republicans are currently weighing the best ways to devote more resources to the Internal Revenue Service (IRS) after years of budget cuts at the agency, but that doesn’t necessarily mean the number of audits are set to increase, experts say.
“The number of audits for people with over $1 million in income each year, those are down in 2016 … [to] about half of what they were … when I was commissioner,” Mark W. Everson, former IRS commissioner from 2003-2007 and vice chairman of the Alliantgroup, told FOX Business.
Throughout fiscal year 2016, the overall number of individual tax returns audited by the IRS dropped to 0.7%, the lowest level in more than a decade. About one million returns were analyzed, representing a 16% decline over the year prior and a decrease of more than 33% since 2011.
“I left in ’13 and already [the number of audits were] beginning to go down,” former acting IRS commissioner in 2012 and national director of tax at the Alliantgroup Steven T. Miller told FOX Business. “But it’s really dropped since then. It’s tied to the budget...”
Since fiscal year 2010, IRS funding levels have declined by about 20%, National Taxpayer Advocate Nina Olson said. The agency received $11.2 billion in funds during the last fiscal year, and the Trump administration’s initial budget blueprint for 2018 aimed to cut another $239 million. The fiscal year 2018 budget has yet to be finalized.
Earlier this month, Olson told Congress the agency would need $495 million in additional funds in order to support the GOP’s tax reform overhaul.
However, even if Republicans grant the IRS the extra cash, and both Everson and Miller believe the agency will receive extra resources in some form, it is unlikely to be allocated toward enforcement in the near-future.
“I think the money that they’re looking to get has to be for implementing the law: Less on the enforcement side right now and more on the services side and more on the IT side,” Miller said. “There may be some enforcement dollars, [but] that would be more of a surprise to me.”
According to the most recent report, spanning the years 2008 through 2010, the U.S. tax gap was $458 billion, 18% of what was owed. Fifty-two billion dollars was eventually recovered, leaving the net value at $406 billion, which was largely the consequence of underreporting. Meanwhile, IRS enforcement staff declined 23% between 2010 and 2016, to 38,800 individuals, according to the Government Accountability Office, as reported by The Los Angeles Times.
Everson said this is a trend that will only reverse if Congress wants it to.
Taking into consideration the “massive” changes made to the tax code late last year, the probability of noncompliance, even if unintentional, increases moving forward, Miller acknowledged.
While Everson pointed out that a greater number of people itemizing under the new law could eliminate some opportunities for mischief, Miller said there’s a fringe group of individuals who don’t report withholding amounts through W-2 forms and “need the fear of examination.”
“The lack of audits, at some point, is going to impact whether people comply or not,” he added.
In fact, taxpayers already fail to report about 63% of income from which there is no information reporting, according to The Tax Policy Center.
Since some enforcement procedures at the IRS are tied to budgetary constraints, the number of audits moving forward could be linked to the success of the tax reform rollout. Everson views tax reform as an opportunity for the IRS to start fresh. But, if for some reason there are problems with the new documents or another aspect of the changing system, relations and funding may not improve.
The IRS will be issuing new forms next year, so as Miller pointed out, its success implementing the new system won’t be quantifiable until the spring of 2019.
While the IRS may ultimately be blamed for any missteps or failures in the system, Miller said it’s really a “leadership moment” for the White House and Congress to give the agency the assets it needs to succeed.