The IRS Is Auditing a Lot Fewer Americans

The IRS audited 1 in about 160 individual tax returns in 2017, the lowest since 2002 and the sixth consecutive year that audits have declined, as budget cuts have reduced the number of staff at the federal agency.

The Internal Revenue Service—which has lost nearly a third of its enforcement employees since a 2010 peak, when it audited 1 in 90 individual returns—audited 0.62% of individual returns in the fiscal year that ended Sept. 30, according to IRS data released Thursday.

The audit rate declined the most for high-income households, although they were still audited at a higher rate than filers of other income levels.

In 2017, the IRS audited 4.37% of returns with income of $1 million and higher, less than half the 9.55% audit rate for such returns in 2015. It marked the lowest rate of audits for that income group since 2004, when the data were first released. In late 2015, the Treasury inspector general said that high earners should be an enforcement priority for the IRS.

The audit rate for other income groups also declined, but not as much. For taxpayers earning less than $200,000, the percentage of returns audited dropped to 0.59% in 2017 from 0.76% in 2015.

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Andy Mattson, a certified public accountant at Moss Adams LLP in Silicon Valley with many wealthy clients, said he has noticed the decline in audits of high earners. “We get far more state audits of our clients than IRS audits,” he said.

An IRS spokesman said the drop in audits of high earners reflects the continuing decline in IRS compliance personnel. These filers often have more complex returns that take longer to examine and require more highly skilled staff. In addition, the number of taxpayers reporting income above $1 million rose nearly 25% between 2015 and 2017.

Created with Highcharts 6.0.4Shrinking StaffIRS enforcement personnelSource: Internal Revenue Service

In 2017, IRS funding was $11.2 billion, down nearly 8% from its high in 2010, although the number of individual returns grew nearly 5% over the same period. For fiscal 2018, the IRS’s funding rises slightly, to $11.4 billion.

From a revenue standpoint, filers earning over $1 million in tax year 2015 accounted for 28% of total income taxes, up from 25% in 2013, according to the latest available IRS data. For 2015, filers earning between $200,000 and $500,000 paid nearly 21% of the total. Filers earning between $100,000 and $200,000 paid 22%.

The IRS’s audit statistics don’t include the results of document-matching requests, which are typically generated by computer. Such requests ask the taxpayer to explain discrepancies between the tax return and information reported by a third party like a bank or broker. In 2017, 3.3 million cases in this program brought in revenue of $6.6 billion, which was lower than in the prior year, according to IRS data.

Revenue from individual income taxes is the single largest source of federal receipts and has been growing as a percentage of the total. In fiscal 2017, it accounted for nearly 48% of federal revenue, up from 45% a decade earlier, according to data from the Joint Committee on Taxation, a nonpartisan committee of Congress with professional experts on staff.

The revenue from corporate taxes accounted for 9% of total revenue in 2017, down from 12% a decade ago, the committee’s data show.

Business audits declined in 2017 for the second consecutive year. The audit rate for all businesses dropped to 0.44% in 2017 from 0.71% in 2012, the peak for the decade, according to the IRS.

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The only category of businesses for which audits didn’t drop in 2017 was partnerships. That audit rate was 0.38% for both 2016 and 2017.

Write to Laura Saunders at laura.saunders@wsj.com

Appeared in the March 30, 2018, print edition as ‘Audit Rate Hits Lowest Level in Years.’

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