Millionaires Face Near-Zero Chance of IRS Audit -- For Now

(Bloomberg) -- If you have an income of $1 million or more there’s less than a 1% chance that the IRS has called you in for an audit, according to new figures from the agency.

So far, the Internal Revenue Service has audited 0.05% of those earning $1 million to $5 million in 2018, according to data released Monday. For those reporting $10 million or more, that figure drops to 0.03%.

In total, the IRS has audited about 0.15% of individual returns from 2018, with people claiming the earned income tax credit most likely to face an examination at a rate of 0.6%. An IRS official said the audit rates appear to be lower than in previous years because of a new way of calculating audits. Those figures will increase in coming years as auditors open more cases before the three-year statute of limitations runs out.

The new calculations mean that the audit data is complete for returns filed in 2015 or earlier, IRS officials told reporters on a call Monday. That’s because the statute of limitations has run its course on those returns so the agency isn’t conducting further audits for those years. But for returns filed in 2016, 2017 and 2018 -- the last year covered by the new report -- the IRS will update the figures annually until the statute of limitations runs out.

Still, IRS audit rates have been trending downward for years as budget cuts and staff reductions have hobbled the agency’s ability to conduct widespread audits. The IRS audited nearly 14.5% of returns reporting $10 million in 2012, for returns filed in 2015 that rate fell to about 8.2%.

Fewer Resources

“For the past decade, the IRS has seen an increase in the number of returns filed as well as a decrease in resources available for examinations,” the IRS said in its annual data book released on Monday. For example, in fiscal year “2010, the IRS received 230.4 million returns and employed 13,879 revenue agents, compared to 253.0 million returns and 8,526 revenue agents in FY 2019.”

Audit rates could further decline in future reports as the coronavirus pandemic has halted many agency operations. The IRS initiated 71% fewer corporate audits this spring compared with the same time period a year ago, according to a separate report released Monday.

The the IRS began 718 corporate audits from April 1 to June 1 this year, compared with 2,445 in 2019, according to a National Taxpayer Advocate report. The number of partnership audits fell 79% and individual examinations dropped 65%, the report said.

The reduction is a result of an IRS decision to delay starting many new audits between April 1 and July 15, unless the statute of limitations would run out and keep the agency from pursuing a case later. The IRS continued to work on existing audits remotely “where possible,” but significant delays were caused by phone line closures and closed IRS offices where mail went unopened, according to the report.

The IRS is unlikely to make up for the decline during the coronavirus pandemic, when many employees have been unable to fully do their jobs from home because of laws protecting sensitive taxpayer data.

“The IRS has begun reopening its operations, but it will take some time before they are restored to full capacity,” the report said.

The data was included in the National Taxpayer Advocate’s annual report to Congress. The office is an independent unit within the IRS that helps taxpayers with significant problems.

The IRS faces another challenge as it continues to bring workers back to its offices, because the normal April 15 filing deadline was extended to July 15. Treasury Secretary Steven Mnuchin said he has received requests to further delay the due date, but hasn’t yet made a decision.

Many taxpayers filed before the extension was announced, but the IRS is still expecting millions of tax returns to be submitted.

By May 22, the IRS had received nearly 120 million individual tax returns of the more than 150 million it expects, the report said.

©2020 Bloomberg L.P.