Three Major Trends in Irs Tax Audits
Most people think of the IRS as an organization that investigates taxpayers, levies fines, and assesses criminal penalties. While those things do happen, they're not always true and don't happen often. The IRS’s work has shifted in recent years to chasing down offshore accounts and tax delinquencies. The IRS tax consultant company can audit only 1.5 percent of taxpayers. The overwhelming majority of audits will never be audited. The IRS is much less aggressive than it used to be. In fact, in 2019 there are no more criminal penalties for failure to pay taxes on time (they used to be up to 5 years in prison), and most audits don't result in criminal charges (they were up to 5 years in prison).
The IRS’s auditing power has been greatly diminished in the past decade. The audit rate has decreased from 0.9 percent in 2010 to 0.5 percent in 2018, while IRS audit resources have been cut by 28% during the past ten years.
The IRS tax consultant has been given the mandate to do more with fewer resources since 2010, yet the truth is that the IRS is unable to conduct more audits with fewer resources. The IRS audit data indicates three major trends from the previous ten years that have changed the way IRS audits are conducted now:
Table of contents:
1. An audit is ignored by an alarmingly large number of people
2. Audits' primary concern: The EITC
3. The majority of audits are conducted via mail
Conclusion
1. An audit is ignored by an alarmingly large number of people
The low-income population, who often live paycheck to paycheck, never seeing much of a balance in their bank account, are the tax system’s biggest winners. There is a link here to the EITC mail audit. With two-thirds of all mail audits going without response and only one in five taxpayers agreeing to the IRS’s determination, many tax debtors are forced into audit reconsideration requests. The increasing caseload of these requests places a burden on the IRS Tax Audit Help team and leads to tens of thousands of dollars in federal employee overtime pay.
Mail audits are a key part of the IRS’s efforts to collect uncollected tax dollars, but the IRS tax representative team should review how it conducts these audits so that it uses resources more effectively. For example, the IRS should maximize the use of technology in its correspondence efforts, focus on taxpayers with greater ability to pay, and identify non-filers as a high priority for follow-up.
2. Audits' primary concern: The EITC
A taxpayer seeking the Earned Income Tax Credit is involved in 50% of all individual audits. The majority of IRS tax debt relief initiatives to reduce EITC mistakes rely on audits to hold a dubious EITC claim on a return. The EITC audit rate is the key piece of evidence used by politicians to accuse the IRS of targeting low-income taxpayers. The IRS prefers to deal with EITC taxpayers more than other taxpayer types, including small-business taxpayers, as compared to other taxpayer profiles.
EITC, a tax credit for low-income working families, has been subject to scrutiny by the IRS. The number of audits involving the Earned Income Tax Credit (EITC) has increased exponentially over the last decade. About half of all individual audits include an EITC adjustment. High-wealth individuals also fall under audit scrutiny and are subject to increasingly more audits, as well as interest underpayment and failure to file penalties.
3. The majority of audits are conducted via mail
With IRS revisions in the late 1990s, this trend got underway. In 1998, shortly before the changes, the department mailed audits to 47% of taxpayers. IRS data from the previous ten years demonstrates that the agency favors the less invasive letter audit. Since 2010, the proportion of mail-based audits of individual taxpayers has remained at three out of four. These audits often focus on minor credits or deductions on a return and merely require a written response, accompanied by supporting evidence, to be sent to an IRS central campus office.
The IRS's preferred method for auditing taxpayers today is via mail. The increased use of mail audits has led to fewer in-person audits and a lower average audit cost. While the IRS Tax Audit Help team still uses its system of risk-based selection and expandable criteria, including mileage, to conduct an in-person audit, mail audits are generally guided by a general set of five asserted positions that can be sustained through the good documentation provided by taxpayers on their returns.
The IRS has been shifting the burden of proof in tax audits from examiners to taxpayers. With this latest IRS tax debt relief reform, audits will be done through mail correspondence. This means that if you receive a notice from the IRS that your taxes are being audited, all you need to do is submit your documents and any required information via mail. The IRS saves you time and money by auditing your return through the mail rather than in a face-to-face meeting at an IRS office. It evens the playing field for small businesses and self-employed individuals.
Conclusion
For a long time, fear of an audit has been the main driver of compliance with the IRS. The 2018 Comprehensive Taxpayer Attitude Survey shows that 63 percent of taxpayers are still afraid of audits. But what does this mean for taxpayers? What does it mean for the Treasury and for tax cheats? The IRS is looking to close the tax gap by educating taxpayers and changing their behavior. While fear of an audit was a main driver of compliance, the survey showed that taxpayers were no longer concerned about being audited.
Taxpayers who have not done a good job of reporting income and expenses do not receive an audit from the Internal Revenue Service. Instead, these taxpayers receive large numbers of notices from the IRS as a means to let them know that someone is watching. While this has been the practice for some time, it appears that the IRS is trying to get more aggressive about its methods; over 219 million notices were sent out to taxpayers in 2012, according to the Treasury Inspector General for Tax Administration.