The IRS has issued its annual data book that gives a statistical snapshot on fiscal year 2005. IRS Fiscal Year 2005 Data Book. At first glance, the statistics on enforcement look good. Here's the Data Book description of increased audits in the beginning paragraphs.
"For instance, the number of audits of high-income taxpayers--those earning $100,000 or more--reached 219,208, the highest figure in 10 years. Total audits of all individual taxpayers exceeded 1.2 million, up over 20 percent from 2004. In addition, audits of large corporations with assets of $10 million or more increased by 14 percent from a year ago to 10,829." Id.
But when you examine the details, the report on audits is discouraging. While the report shows an increased audit rate for individual taxpayers compared to the year before, that rate is still amazingly low: only 0.93% of individual returns are audited. And while audits of large corporations have increased (to about 20% in 2005), the fact is that they were at an absurdly low 17% in 2004.
Low-income returns and returns claiming the earned income tax credit still garner a considerable portion of audit attention. For 1040A filers with income below $25,000, 0.52% were audited in 2005, and for all others with taxable positive income under $25,000, the audit rate in 2005 was 1.48%. Of the 1,215,308 individual returns subjected to examination, a substantial number--521,872 or about 43%--were examined because they claimed the earned income tax credit.
The RIA release on the 2005 Data Book (52 Fed. Taxes Weekly Newsletter No. 12, Mar 23, 2006) pulls out some interesting comparisons. While audit rates have increased compared to recent years, they have merely recuperated to the rates that prevailed in the late 1990s. They have still not caught up to the 1980s, when the overall rate was about 2%. For individuals not filing a Schedule C, only 1.19% of those with income of $100,000 and over were audited in 2005. That was a decline from the 1.39% rate for the highest income group in 2004. (Note that these figures are not broken down sufficiently for anyone to discern how stringently the wealthiest group of taxpayers--those with income of $1 million or more--are audited.)
Furthermore, the vast majority of individual audits--985,446 out of 1,215,308 audits or about 80%, are handled by compliance center correspondence rather than face-to-face audits.
All in all, the audit rates and the substantial use of correspondence audits suggest that the audit lottery game remains a strong enabler of taxpayers who take super-aggressive tax return positions: the risk of audit, or of discovery even if a return is audited, remains invitingly low. Instead of spending tax enforcement dollars on private collectors who will get high fees for collecting "easy pickings", the government would be better off increasing enforcement funding for government collections and audits.
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