Audits and Income Level: Is the IRS Evenhanded in its Scrutiny?

“Follow the money” is a well-worn cliché of political life.

Of course, tax collection isn’t supposed to be political. But is the IRS evenhanded when it comes to deciding which tax returns get audited?

In this post, we will explore that question.

Recent data from the IRS itself suggests that there is an increasing focus on auditing high-income returns.

In the most recent fiscal year, the percentage was up for audits of returns with income above $1 million. It increased from 7.5 percent to nearly 10 percent.

To be sure, the overall number of tax audits is down. The IRS audited less than 1 percent of individual tax returns in 2015. That was the lowest rate in ten years.

IRS Commissioner John Koskinen attributes the decline in the number of audits to budget cuts at his agency. Compared to 2010, the IRS is handling about 10 million more returns. But its funding is hundreds of millions of dollars below what it was in 2010.

The reduced funding translates into fewer employees to enforce tax compliance – about 25 percent fewer than in 2010.

This has happened despite the fact that every dollar put into the IRS generally yields multiple dollars in tax revenue collected. According to one IRS estimate, the ratio is 1 to 4. In other words, the IRS collects $4 in tax revenue for every additional dollar of agency funding.

With the IRS’s budget going down, however, it appears the agency has adopted a strategy of focusing more on higher-income returns – particularly those of $1 million or more.