Few Things Can Generate As Much Taxpayer Concern, Confusion And Controversy As An IRS Audit.
Tax audits are a critical compliance tool to help ensure fairness in the tax system, and the IRS works hard to ensure the agency's audit selection process is fair and impartial. Decisions to conduct audits are based on the financial information that's on – or not on – the tax return. There's an extensive set of checks and balances to ensure fairness with individual audits, and there are important protections and appeals for taxpayers during the administrative process as well.
But before an audit of a taxpayer takes place, the IRS career leadership team must make higher-level decisions on where to focus our limited audit resources across the agency. Given the breadth of our economy and the types of income people have, the IRS takes steps to ensure audits are spread across income categories – to ensure fairness and support voluntary compliance with the nation's tax laws.
Like many things involving taxes, there are complexities behind audit rates. On the surface, these can be easy to misinterpret. A Closer Look at audit rates provides insight into which income groups are more likely to be audited.
Higher - Income Taxpayers Face Greater Chance of Audit
Despite common misperceptions about IRS examination rates, the reality is that the likelihood of an audit significantly increases as income grows.
Taxpayers with incomes of $10 million and above had substantially higher audit rates than taxpayers in every other income category for each calendar year from 2010 through 2015. Those with incomes above $1 million also had higher exam rates than all other groups earning less.
Tax Year 2015 provides a good historical overview of where IRS compliance priorities are focused. The exam coverage rate of taxpayers with incomes of $10 million or more is 8.16%. The rate for those between $1 million and $10 million is 2.53%. And other income categories are far below that – generally less than 1%.
Tax Year 2015 is the last year for which we know the actual audit rates, because the IRS can still open audits for more recent years, so the data for more recent years is not yet complete.
The IRS normally has three years to assess tax from when a return was filed. For example, the IRS would normally have until at least October 15, 2021 to assess additional tax on a tax return filed October 15, 2018, for the 2017 tax year.
Higher-income tax returns are more complex, and they can take much more time to complete – frequently several years after the tax return is filed. Therefore, to get the complete picture of the audit rate for a specific tax year, audits in process as well as completed audits must be included.
On the other hand, audits of low- and moderate-income tax returns take less time to resolve. Each year, approximately 25 million lower-income taxpayers seek a refundable EITC which on their return involves a single issue that can be quickly resolved, sometimes within a month or so of filing the return. The IRS prioritizes a prompt review of these returns in order to quickly issue the EITC refund to people in need, most frequently within 21 days following the filing of the return, without any further audit of such returns. The average time to complete an EITC audit is five hours per return.
The IRS averages approximately 300,000 EITC audits per year out of the universe of 25 million. The total universe of tax year 2015 returns in income categories of $1 to $5 million, $5 million to $10 million and $10 million and over was 478,772. It is important to look at the percentage of filers audited in each income category rather than merely the number of audits in each income category.
The chart below shows that higher-income taxpayers were audited at much higher rates in 2013-2015. Data is not yet complete for the more recent years, particularly for high-income taxpayers for the 2016 through 2018 tax years, where many examinations are in the process or have yet to even begin.
IRS Audit Rates by Income Category: 2013-2015
Shows More Exams For Higher Income Over Time
Total positive income Total returns filed in TY2013 Returns examined* Percent covered No total positive income** 619,694 78,573 12.68 $1 under $25,000 56,181,555 464,856 0.83 $25,000 under $50,000 34,753,396 121,841 0.35 $50,000 under $75,000 19,532,032 63,700 0.33 $75,000 under $100,000 12,787,903 52,852 0.41 $100,000 under $200,000 17,451,788 90,236 0.52 $200,000 under $500,000 4,844,782 40,290 0.83 $500,000 under $1,000,000 800,121 11,802 1.48 $1,000,000 under $5,000,000 342,605 10,782 3.15 $5,000,000 under $10,000,000 23,413 1,499 6.40 $10,000,000 and above 14,009 1,689 12.06
Total positive income Total returns filed in TY2014 Returns examined* Percent covered No total positive income** 662,876 49,829 7.52 $1 under $25,000 54,956,300 390,799 0.71 $25,000 under $50,000 35,090,262 147,805 0.42 $50,000 under $75,000 19,676,659 82,822 0.42 $75,000 under $100,000 13,130,657 49,717 0.38 $100,000 under $200,000 18,405,264 73,729 0.40 $200,000 under $500,000 5,324,980 29,884 0.56 $500,000 under $1,000,000 910,977 10,362 1.14 $1,000,000 under $5,000,000 401,634 10,651 2.65 $5,000,000 under $10,000,000 28,847 1,512 5.24 $10,000,000 and above 18,122 1,572 8.67
Total positive income Total returns filed in TY2015 Returns examined* Percent covered No total positive income** 701,594 31,329 4.47 $1 under $25,000 54,135,898 357,410 0.66 $25,000 under $50,000 35,589,401 141,727 0.40 $50,000 under $75,000 20,312,858 108,219 0.53 $75,000 under $100,000 13,063,770 64,324 0.49 $100,000 under $200,000 19,459,846 92,124 0.47 $200,000 under $500,000 5,788,644 31,804 0.55 $500,000 under $1,000,000 962,481 10,898 1.13 $1,000,000 under $5,000,000 428,082 10,244 2.39 $5,000,000 under $10,000,000 31,159 1,367 4.39 $10,000,000 and above 19,531 1,593 8.16
Source: Table 17a, Internal Revenue Data Book, 2019
*Returns examined is total of columns “Closed” and “in process”.
** Returns that show no total positive income report zero or negative income. The negative income could be negative business income and/or capital losses. Returns with no TPI are filed by taxpayers in any of the income categories, and there is no prevalence of one over the other. These returns account for less than 0.5% of the individual filing population.
The typical audits for higher-income taxpayers involve at least three different tax years, often include related entities, and routinely take years to resolve. The highest income taxpayers face the most significant chance of an examination, and they face the most highly trained and experienced IRS agents and teams utilizing our most sophisticated tools and techniques.
At the end of the day, the IRS strives to properly serve compliant taxpayers and uphold the nation’s tax laws, ranging from civil side audits and notices to criminal investigations in the most egregious cases. We face tough choices each year as far as where to deploy resources given the breadth of our responsibilities, but our choices are guided by fair and impartial audit plans throughout the process.
Source: Comments from Deputy Commissioner Sunita Lough, October 20, 2020
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