Study Finds IRS Audits Not Focused on High-Income Earners

New research finds the Internal Revenue Service (IRS) is aiming civil audits at low-wage earners, demonstrating a confounding approach to a group less known for tax fraud than those with greater wealth.

The earnings gap in the U.S. and around the world continues to increase. Throughout the pandemic, the wealthy fared better than those buffeted by job loss and dramatic economic swings. Even before the pandemic and throughout, the IRS has spoken about an enforcement focus on high-asset taxpayers. Prosecutorial efforts aim at opaque offshore tax shelters, money laundering, and foreign bank accounts unaccompanied by an FBAR and FATCA submission. Overall—a fair bit of media discusses the drive of the IRS to uncover high asset tax crime.

Despite the talk, a report published by the Transactional Records Access Clearing House (TRAC) of Syracuse University says otherwise. A report looking at data for 2021 offers a different picture of the present priorities of the IRS. TRAC found that low-income earners (defined as gross annual receipts of less than $25,000) were audited at five times the frequency of other taxpayers in 2021. Other interesting findings of the review included:

• In 2021, the IRS audited roughly 659,003 returns, or about one in four returns filed. The audit rate was slightly lower than in 2019 and slightly higher than audit levels in 2020.
• The IRS increased its annual audit figures by significant use of correspondence audits—those done by mail that focuses on specific components of a filed return. In 2021, audits by mail made up 85 percent of all audits performed.
• In 2021, 54 percent of these correspondence audits were aimed at taxpayers who earned less than $25,000 and claimed an earned income tax credit. Essentially, the earned income tax credit offers a tax break to lower-income wage earners. It is discouraging to consider an anti-poverty measure could be used as a metric for an IRS civil audit.

The TRAC report quotes The IRS Taxpayer Advocate 2021 Annual Report to Congress noting, “The IRS correspondence audit process is structured to expend the least amount of resources to conduct the largest number of examinations – resulting in the lowest level of customer service to taxpayers having the greatest need for assistance.”

The IRS gives taxpayers virtually incapable of high-ticket tax fraud the benefit of IRS expertise, prosecutorial energy, and limited budget—in order to enforce and encourage tax compliance of a demographic on which there is virtually no return for the U.S. Treasury. The latest TRAC study reporting on the first several months of 2022 indicates the IRS continues to target the lowest-paid Americans—and at a higher rate than this time in 2021. In 2022, the IRS has now increased its field audits—making use of specialized, trained investigators—to pursue households barely getting by.

Apparently ruffled by the unfavorable coverage of the IRS, Director Charles Rettig retorted “That report from Syracuse University is absolutely 100% false.” When asked in a letter for the basis of his remarks by TRAC, not surprisingly, Director Rettig did not respond.