As millions of Americans raced to meet yesterday’s tax deadline, their chances of getting audited are lower than they have been in years. Budget cuts and new health care responsibilities are straining the Internal Revenue Service’s ability to police tax returns. This year, the IRS will have fewer agents auditing returns than at any time since at least the 1980s. Taxpayer services are suffering, too, with millions of phone calls to the IRS going unanswered.
Better technology is helping to offset some budget cuts. If you report making $40,000 in wages and your employer tells the IRS you made $50,000, the agency’s computers probably will catch that. The same is true for investment income and many common deductions that are reported to the IRS by financial institutions. But if you operate a business that deals in cash, with income or expenses that are not independently reported to the IRS, your chances of getting caught are lower than they have been in years. Last year, the IRS audited less than 1% of all returns from individuals, the lowest rate since 2005. This year, according to IRS Commissioner John Koskinen, “The numbers will go down.”
The IRS budget has declined from $12.1 billion in 2010 to $11.3 billion in the current budget year. According to Koskinen, spending can be cut in three areas: enforcement, taxpayer services and technology. Technology upgrades can only be put off for so long, so enforcement and taxpayer services are suffering. Last year, only 61% of taxpayers calling the IRS for help got it. This year, Koskinen expects the numbers to be similar. To help free up operators, callers with complicated tax questions are directed to the agency’s website.
Your chances of getting audited vary greatly, based on your income. The more you make, the more likely you are to get a letter from the IRS. Only 0.9% of people making less than $200,000 were audited last year. That’s the lowest rate since the IRS began publishing the statistic in 2006. By contrast, 10.9% of people making $1 million or more were audited. That’s the lowest rate since 2010. Only 0.6% of business returns were audited, but the rate varied greatly depending on the size of the business. About 16% of corporations with more than $10 million in assets were audited.
Most people don’t have much of an opportunity to cheat on their taxes, said Elizabeth Maresca, a former IRS lawyer. Your employer probably reports your wages to the IRS, your bank reports interest income, your broker reports investment income and your lender reports the amount of interest you paid on your mortgage. One flag for the IRS is when your deductions or expenses don’t match your income, said Joseph Perry, a partner at Marcum LLP. For example, if you deduct $70,000 in real estate taxes and mortgage interest, but only report $100,000 in income.
Koskinen said the IRS could scrutinize more returns — and collect billions more in revenue — with more resources. The president’s budget proposal says the IRS would collect an additional $6 for every $1 increase in the agency’s enforcement budget.