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Audits of Millionaires Have Dropped 72 Percent Since 2012

Chris Gaetano
Published Date:
Mar 22, 2021

The downward enforcement trend on high-income taxpayers continued through 2020, as shown by a recent report that found that, overall, audits of millionaires have decreased  by 72 percent since 2012. The report, by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University, said that fewer than 2 percent of taxpayers with incomes of a million dollars or more were audited in 2020, despite the absolute number of such people having doubled since 2012. While there were 40,965 audits of millionaires in 2012, that number in 2020 was a much smaller 11,331; revenues collected from these people, therefore, were also down: while in 2012 the government collected about $4.8 billion from them, in 2020 the IRS had collected $1.2 billion.

"With 98 percent of millionaires escaping any scrutiny, fewer audits in all likelihood means many millionaires escape paying billions of dollars owed the U.S. Treasury," said the report.

The report found similar results when looking at corporate taxes. Only about one-third of the 755 largest corporations in the country (those with over $20 billion in assets) faced an IRS audit last year; in contrast, in 2012, the report said the agency had audited 93 percent of returns from such companies. This has had the effect of making collections plunge from $10 billion in 2012  to $4.1 billion in 2020. The report noted that this is only counting the largest corporations; if one accounts for companies reporting over $250 million in assets, then enforcement revenue has dropped from $24.4 billion in unreported taxes to $5.4 billion in FY 2020.

Finally, the number of referrals for criminal prosecution has also dropped to a historic low; such referrals are just a quarter of what they were at peak, in 1993.

The report mostly blamed budget cuts, which have seriously undermined the agency's ability to administer tax laws in a fair and effective manner, along with growing administrative responsibilities (e.g. overseeing the Affordable Care Act, the stimulus, etc.) for the discrepancy. It warned that the continued downward enforcement trend not only denies the government money it is owed, it undermines people's faith in the system.

"Fewer revenue agents combined with in­creased filings of high-end returns have produced a predictable downward spiral in gov­ern­ment audits of the wealthiest taxpayers and America's corporate giants. Billions of dol­lars are at stake, as is American faith in the fairness of our federal tax system," said the report.

IRS treatment of wealthy taxpayers has been an ongoing concern over the years. The Government Aaccountability Office, for example, said that without more staff, the IRS cannot properly enforce the tax laws, which has led to billions of dollars of unpaid taxes every year. The Treasury Inspector General for Tax Administration (TIGTA), more recently, faulted the IRS for failing to act on high-income nonfilers who, it said, owed billions in taxes. The report also bears out the conclusions made in other academic studies as well, such as a an analysis which found that America's 400 richest families now pay taxes at a lower rate than people in the middle class.

It also aligns neatly with a paper recently publushed by the National Bureau of Economic Research which said that random audits do not capture most tax evasion throughoffshore accounts and pass-through businesses, both of which are quantitatively important at the top income distribution. Overall, through using IRS audit data and comparing it with other information, it researchers concluded that unreported income as a fraction of trueincome rises from 7 percent in the bottom 50 percent of taxpayers to more than 20 percent in the top 1 percent, of which 6 percentage points correspond to undetected sophisticated evasion.

"Investigating taxpayers who voluntarily declared hidden wealth or started reporting foreign bank accountsin 2009–2012 and who had been randomly audited just before, we find that in the vast majority of cases, theaudits had failed to uncover offshore tax evasion. Focusing on taxpayers who earn business income throughpartnerships and S-corporations, we find that due to the resource constraints inherent to the conduct ofrandom audits, a large fraction of this business income is not examined in the context of these audits, biasingdetected evasion downward at the top," said the study's conclusion.

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