Millionaires and Corporate Giants Escape IRS Audits Again in FY 2020
At a time when Americans face growing economic inequality and financial hardship caused by the COVID-19 pandemic, the Internal Revenue Service (IRS) is letting billions of dollars in tax revenue slip through its fingers because budget and staffing cuts have left the agency incapable of fairly and effectively auditing the 637,212 millionaires now living in the United States.
Over the past decade, Congress has imposed severe funding and staffing cuts at the Internal Revenue Service, cuts that have seriously undermined the agency's ability to administer tax laws in a fair and effective manner. At the same time, Congress has handed the IRS new responsibilities, including coping with major changes to the tax law[1] and sending out repeated rounds of stimulus payments to millions of taxpayers. The latest round of $1,400 stimulus checks is just going out now while the IRS is busy with the current tax filing season.
Some of the largest budget cuts over the last decade have reduced the number of IRS revenue agents. The number of IRS revenue agents is down by 43 percent since 2010[2]. See Figure 1. The decline in revenue agents undermines the agency's work because revenue agents are the only auditors qualified to examine complex tax returns, and complex tax returns are precisely the types of returns filed by high income individuals and large business firms. Fewer revenue agents at the IRS means fewer audits of wealthy tax filers and large businesses.
The United States is experiencing growing inequality. For instance, the Pew Research Center shows that the only families in America to gain wealth since the Great Recession are the wealthiest families[3]. Despite growing inequality, the government is less prepared than in the past to evaluate whether wealthy individuals and businesses properly report their true incomes and pay taxes on these dollars.
Fewer revenue agents combined with increased filings of high-end returns have produced a predictable downward spiral in government audits of the wealthiest taxpayers and America's corporate giants. Billions of dollars are at stake, as is American faith in the fairness of our federal tax system.
How bad is the current situation? Here is what the latest IRS data show covering FY 2020. These internal agency documents were obtained under court order by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University.
Audits of Millionaires
Less than 2 out of every 100 taxpayers reporting over a million dollars of income were audited last year[4]. While the ranks of millionaires have nearly doubled since FY 2012[5], the number of millionaire returns that were audited has actually fallen 72 percent - down from 40,965 millionaire audits in FY 2012 to just 11,331 in FY 2020. See Figure 2.
In FY 2012, audits of millionaires turned up $4.8 billion in unreported taxes. Now with less than a third the number of audits, the government uncovered only $1.2 billion in unreported taxes in FY 2020. With 98 percent of millionaires escaping any scrutiny, fewer audits in all likelihood means many millionaires escape paying billions of dollars owed the U.S. Treasury.
Audits of Corporate Giants
Nearly two out of every three of the 755 largest corporations in the country - those with over $20 billion in assets - were not audited last year. As recently as 2012, nearly all such returns (93%) were being examined by the IRS[6]. See Figure 3.
Audits in 2012 of these corporate giants turned up $10.0 billion dollars in unreported taxes. This had dropped by more than half to just $4.1 billion during FY 2020. The dollar significance is even greater if the focus expands to corporations reporting over $250 million in assets. Audits of these large corporations in FY 2012 turned up $24.4 billion in unreported taxes. This fell to just $5.4 billion in FY 2020.
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Criminal Prosecutions
As audit odds shrink, the potential financial incentives for tax cheating increase. Yet budget cuts have also reduced the ranks of IRS criminal investigators by 26 percent over the last decade[7]. Not surprisingly, as a result, IRS criminal referrals for prosecution have also plummeted. See Figure 4.
Taxpayers convicted as a result of IRS criminal investigations reached an all-time low in FY 2020 - just 533 out of the hundreds of millions of taxpayers in this country. And just 255 of these convictions were for tax fraud or other Internal Revenue Code violations. IRS of course has major responsibility for not only going after tax cheats who don't pay their taxes on legal sources of income, but also for tax evaders that fail to report and pay taxes on illegally gotten gains. See here for more details. Thus, the lead charge in six out of every ten of those convicted during FY 2020 after IRS referrals were for such offenses as aggravated identity theft, money laundering, mail or wire frauds, as well as drug crimes.
Restoring Faith in Our Democratic Institutions
As public attention focuses on how the country can restore faith in our democratic institutions, one area that should not be overlooked is how the nation can better ensure that our income tax laws are fairly and effectively administered.
Footnotes
[1] This sweeping change in the tax laws, the Tax Cuts and Jobs Act (TCJA), was passed in December 2017.
[2] This comparison is based on the number of revenue agents IRS had on the payroll In September 2020 compared with the number in September 2010.
[3] https://www.pewresearch.org/social-trends/2020/01/09/trends-in-income-and-wealth-inequality/.
[4] To the extent taxpayers under-report their income, the number of millionaire returns is likely to be higher and audit rates even lower. Even in FY 2012 inadequate attention was given to the very top income levels reporting $10 million or more despite the creation of a special IRS Global High Wealth (GHW) group, "Few Millionaires Audited by IRS Global High Wealth Group."
[5] According to IRS documents, there were 337,477 income tax returns reporting a million dollars or more of income receipts (TPI) annually filed and available to audit in FY 2012, compared with 637,212 returns this past year. Historically, IRS has used the concept of "total positive income" or TPI which disregards reported losses to classify returns into examination categories. Audit percentages are based upon the number of audits that take place during a fiscal year. Thus the audit rate for FY 2020 (October 2019 through September 2020) uses return filings in the same category during the previous (2019) calendar year.
[6] For earlier trends see earlier 2018 TRAC report, and 2017 report entitled "Nearly Half of Corporate Giants Escape IRS Audit in 2017." See also March 10, 2021 Treasury Inspector General report finding that in the collection of unpaid taxes, millionaire returns are not being effectively targeted.
[7] This comparison is based on the number of criminal investigators IRS had on the payroll in September 2020 (2,025) compared with the number in September 2010 (2,749).