I tried to collect some info on IRS audits… I couldnt find a published number, but I did my own rough estimate based on IRS numbers, and it looks like an EITC return is about 8-9 times more likely to be audited – at least in 2002. (.26% vs 1.86%) Here is other info
Apparently the audit rate for big companies has gone from 70% down to 26% – read about it here.
This article shows how low the audit rate is, and also mentions the special effort to audit EITC recipients.
This article gives an overview of different audit rates – apparently income returns over 1million do get a slightly higher rate of audits – though not as high as EITC returns. Some of this gets complicated – because high income returns are not always very clear cut – but the income is often concealed within other taxable ‘entities’ that can be created – and there are different audit rates for each. I know that one ‘entity’ that wealthy people often use is the S-Corp – and you can notice that its audit rate is significantly lower than the rate for individual high income returns.
Now the IRS tells the story slightly differently – they focus on the % increase in total audits for certain categories, as opposed to the changes in the relative % of audits in each category. In their published documents, they don’t talk about the different success rates for audits at different income levels, and they dont mention low income audits at all. They do show however, a huge drop in audit rates between 1999 and 2000…. so between clinton and bush. They show a rise in high income audit rates, and a drop in the audit rates for businesses. including entities like partnerships and s-corps.
If you fish around in some of the data on this page, it shows that people with their own Self employed businesses are twice as likely to be audited if the business reports less than 25k of earnings.
Still not much directly said about EITC audits… but there is a report from the tax policy center that addresses the issues we talked about in class. This is from the report:
IV. The EITC Compliance Program
Amid all this enlightened activity by the IRS, one example stands out as a misallocation of resources and a failure to balance the rights of taxpayers against the need for enforcement—the EITC compliance initiative. EITC noncompliance appears to be a problem. The IRS estimates that somewhere between 27 and 31 percent of earned income tax credits were issued erroneously in 1999, either because of taxpayer confusion or fraud. They estimate the EITC compliance gap at $7.8 billion in 1998 (See Figure 1), about 0.5 percent of revenues and about 2.8 percent of the total tax gap. But EITC enforcement accounts for 3.8 percent of total enforcement budget in 2003. Indeed, the IRS has requested a 68.5 percent increase in its EITC enforcement budget, while increasing other enforcement by only 3.3 percent. In fact, the increase in EITC enforcement would account for 45 percent of all new compliance dollars. (Internal Revenue Service 2003) On its face, this seems like an inefficient way to spend scarce compliance resources.
The apparently high rates of noncompliance are troubling, but it is necessary to put them in context. Indeed, it is likely that much EITC noncompliance reflects compliance problems that are endemic to the entire income tax. If that is true, then targeting compliance activity at EITC participants alone may not be the most effective use of IRS resources.
The IRS’s current compliance initiative, which will for the first time since 1988 collect information about other than low-income taxpayers, may help resolve some of these issues.
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The report seems to claim that: The IRS is not as well funded as it once was. It is trying to audit many higher income returns and doing some good things with its limited resources. However, it is also devoting excessive resources (relative to its cost benefit analysis) to EITC returns – as part of a ‘special initiative’ to target EITC cheats – when most data shows that this ‘cheating’ is no more, and perhaps even less, than similar ‘cheating’ in other tax brackets.
So anyway – I’m glad we had this discussion – i’m learning a lot about the IRS that i didnt totally know about myself….
