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              Poor Now Face Higher Audit Rate than Wealthy

              Individual and Corporate Audits Down

              Levies, Liens and Seizures Plummet

Syracuse, N.Y.--April 16--In a reversal of past IRS practice, low income taxpayers now stand a greater chance of being audited than higher income taxpayers. Because wealthier taxpayers have more to hide from the government and better opportunities for hiding it, the IRS has historically focused its auditors on their financial activities.

But in fiscal year 1999, the overall audit rate on individual returns reporting $100,000 or more was $1.15%. At the other end of the scale, the rate on simpler returns reporting $25,000 or less was 1.36%. The same unusual audit pattern held true for business returns.

As the audit rates for different income groups were shifting, the proportion of individual taxpayers who faced any kind of audit--either the more rigorous district audits or the semi-automated service center audits--dropped to its lowest rate in modern history, just under one percent (0.90%). Corporations also were treated more gently with the 1999 district audit rate falling to only 1.51%, half what it was in 1992 (2.90%).

Two developments have contributed to the dramatic shift in audit targets from the relatively rich to the relatively poor. One was the congressional mandate that the IRS reduce non-compliance in the Earned Income Credit program, a special tax benefit for low-income Americans. A second factor has been the substantial decline in the size of the IRS during the Bush and Clinton administrations. There were 31% fewer full-time IRS employees at the end of 1999 than in 1988. (By contrast, the FBI today is larger than at any time in its history.) With fewer IRS employees, the face-to-face district audits essential for the examination of larger and more complex returns have steadily slumped. In 1981, for example, the rate for these more intense kind of audits was five times higher than in 1999.

   [For the latest comprehensive data from the IRS, the Justice Department and the courts about the the IRS's audit, collection and criminal enforcement activities--as well as information about the agency's taxpayer services--go to http://trac.syr.edu/media]

Individual taxpayers can face two kinds of audits--the district "face to face" audit and the semi-automated service center audit. While the district audits long have been a focus of public concern, the impact of service center audits is not insignificant. In 1999, for example, the average additional taxes and penalties resulting from service center audits on returns reporting $25,000 or less was $2,171 and required only an hour per "audit."

Many experts argue that the IRS can achieve significant improvements in taxpayer compliance by offering taxpayers better information about their responsibilities. With this goal in mind, the IRS in recent years has increased the proportion of its employees helping taxpayers. In the last two years, for example, the number of IRS personnel assigned to answering its toll free telephones went up by 27%.

Collection. The audit is only one of many IRS enforcement tools designed to encourage taxpayers to meet their responsibilities. For cases where the agency determines an individual has not paid what is owed the government, it can undertake collection actions. Three of the most common are the levy, the lien and the seizure.

The decline in these kinds of collection actions has been precipitous. A levy, for example, is issued against the assets of a taxpayer that are under the control of a third party such as bank accounts or wages after it has been determined that the individual owes taxes. In 1997, the IRS issued 3.7 million levies. In 1999, it only issued 504,403, a drop of 86%. IRS seizures of real property such as cars and jewelry declined by 98% in the same two-year period. According to the GAO, Congressional approval of the IRS Restructuring and Reform Act of 1998 was one of the key elements responsible for the current drop in levies.

Regional Variation. There are numerous and sometimes substantial variations in how the nation's tax laws are enforced in different parts of the United States, even after accounting for differences in the number of taxpayers. Take 1998, for example. The audit rate on income tax returns reporting $100,000 or more in the Los Angeles area was five times higher than for the same group in Houston. The report on simpler returns reporting $25,000 or less in the Southwest district was seven times higher than it was in Michigan. One quite dramatic technique used by the IRS to collect taxes from delinquent taxpayers is to seize their tangible assets, things like cars or jewelry. The rate of such actions in upstate New York--the number of seizures in relation to the number of taxpayer delinquent accounts--was fourteen times higher than in Central California.

TRAC is a non-partisan data gathering, research and data-distribution organization associated with Syracuse University. TRAC has been supported by the University, the Rockefeller Family Fund, the New York Times Company Foundation, the John S. and James L. Knight Foundation and many other organizations. TRAC's embargo on the tax enforcement and staffing information is intended to give news organizations adequate time to contact responsible government officials for their comments. For detailed information about where the latest data is available go to http://trac.syr.edu/media

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