In addition to helping the IRS recover money that tax evaders owe the federal government, experts say audits also play a significant role in deterring fraud.
In addition to helping the IRS recover money that tax evaders owe the federal government, experts say audits also play a significant role in deterring fraud. (Photo : by Zach Gibson/Getty Images)
Naturally, that can lead to a great deal of agitation. According to the IRS, around 60% of taxpayers report that they are honest about their taxes because they are afraid of being audited.
Meanwhile, the Inflation Reduction Act-funded IRS has pledged to step up audits of taxpayers earning more than $400,000 annually in an effort to collect more money and take tough measures against tax evaders. According to Morning Consult research, around 25% of voters voiced anxiety about being audited once the 2022 law was implemented.
What are the chances of being audited, then? Really low. Based on the IRS's most recent statistics available, just 0.2% of all individual income tax returns submitted for the 2020 tax year were subject to an audit. In other words, one out of every 500 tax returns is examined annually.
It's true that certain persons are more vulnerable to audit hazards than others; you could be surprised by one of them. The taxpayers with yearly earnings over $10 million are most likely to be audited; in 2020, 2.4% of their returns were scrutinized. However, taxpayers with low and moderate incomes who claim the Earned Income Tax Credit, or EITC, are the second most likely category to be audited.
Why May the EITC Initiate an Audit?
Policy experts have expressed disapproval of the increased audit rate for those who file claims with the EITC. According to the Bipartisan Policy Center, people of color typically undergo these exams at a disproportionate rate, in part because they are more likely to be eligible for the tax credit.
Depending on their income and the number of dependent children, people can claim varying amounts under the EITC. For example, the maximum EITC payment is $7,430 for a married couple filing jointly with three children and less than $63,398 in income. However, a single taxpayer without children may only claim a maximum of $600.
If the IRS's records indicate that the taxpayer does not qualify for all or part of the credit for example, by claiming a kid for whom they are not eligible, their EITC return may be flagged (which can happen if they are over 19 and not a full-time student). In a 2022 study, the National Taxpayer Advocate observed that almost 8 out of 10 reviewed returns that claimed the EITC had either misreported income or erroneously claimed a child.
However, these audits differ somewhat from the kind that a taxpayer with greater wealth would normally see. The IRS does not use in-person visits from IRS agents, nor does it use "correspondence audits" to handle EITC concerns or audits involving high-income taxpayers. Instead, EITC issues are handled through letters and phone calls.
Are Audits of Taxpayers Becoming More or Less Common These Days?
In contrast, IRS data shows that the audit rate has been falling for years.
For example, according to IRS statistics, the agency audited 9.4% of all tax returns for those above $10 million annually in 2014. That is nearly four times the current audit rate.
Additionally, middle-class taxpayers are far less likely to be audited these days. According to IRS data, the audit rate for individuals earning between $50,000 and $75,000 per year was 4 times higher in 2014 at 0.4%.
The IRS claims that a portion of the cause is because of its declining personnel. The agency employed over 79,000 full-time equivalent employees in fiscal year 2022, a 9.1% decrease from 2013. However, with of funds from the Inflation Reduction Act, the IRS is currently hiring more people and claims to be concentrating on conducting more audits of individuals who make more than $400,000.
