Not many taxpayers are audited. For example, less than 0.38% of all returns were audited for tax year 2022. And even when a taxpayer is "audited," it may not be what you think of in the traditional sense. Recently, the IRS has relied heavily on automated processes to send letters through the mail, asking taxpayers to provide additional documentation rather than sit them down for interrogation.
However, that's not to say that no one is audited. According to the Transactional Records Access Clearinghouse (TRAC) at Syracuse University, the two groups most likely to be audited are millionaires and the lowest-income wage earners -- taxpayers earning less than $25,000 annually.
The wealthy
While the wealthy are one of the most scrutinized groups of taxpayers, they've had it relatively easy for a while. A decade of deep budget cuts has left the IRS unable to ensure that wealthy taxpayers and corporations pay the taxes they legally owe.
The IRS says it's ramping up efforts to find wealthy taxpayers who owe back taxes. Using funds made available through the Inflation Reduction Act, the agency plans this year to pursue 1,600 millionaires who owe at least $250,000 each in overdue taxes.
Auditing the wealthy may involve more legal complexity, but the goal is to generate more tax revenue by focusing on those who hide or underreport their income. In addition, the IRS is also heightening its scrutiny of 75 large business partnerships with assets of at least $10 billion on average.
The IRS intends to use artificial intelligence (AI) to track tax cheats, in addition to live agents.
While right-leaning policy pundits and some Republican lawmakers claim the IRS intends to use this fresh round of funding to target middle-income workers, the IRS says this is simply not true. In fact, the revenue service underscored that it does not intend to increase audit rates for those earning less than $400,000 a year.
This brings us to taxpayers earning less than $25,000 a year, households most likely to face empty bank accounts. Where does this leave the other most-audited group?
Low-income taxpayers
As mentioned, TRAC found that 0.38% of all individual tax returns were audited for tax year 2022. However, among those returns filed by taxpayers earning less than $25,000, that percentage jumped to 1.27%. There are a couple of reasons for this. The first has to do with budget cuts. Here's how it has worked in the recent past:
- Auditing tax returns of high-income taxpayers takes more time and requires more resources, and due to budget cuts, the IRS could not keep up its pace. Between 2010 and 2019, the audit rate for millionaires dropped by 71%.
- Since they were no longer focusing on high-income individuals, the IRS began to focus instead on the simpler returns of low-income taxpayers, disproportionately households of color.
- Due to budget cuts, low-income households became as likely to be audited as those in the top 1%.
The second reason concerns sorely outdated software. Underfunded, the IRS still relies, in part, on computer software from the days of the Kennedy administration. This ancient technology generates paper audits that target benefits like the Earned Income Tax Credit (EITC) -- a tax credit designed for low- to moderate-income working households.
In a sense, it's like picking low-hanging fruit. The IRS pursues the easiest cases to investigate. And compared to wealthy households and corporations with complex, investment-rich returns, low-income households are relatively easy and inexpensive to audit.
Now that the IRS has received a new round of funding and is recommitted to pursuing wealthy tax dodgers, change may be around the corner, and fewer low-income taxpayers will be caught up in audits.
