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Study: IRS Audits of High Earners Yield More Than $12 in Revenue for Every $1 Spent

S.J. Steinhardt
Published Date:
Jun 20, 2023



IRS tax audits provide numerous positive benefits, a new academic paper found, Fast Company reported.

The paper, A Welfare Analysis of Tax Audits Across the Income Distribution, by economists at the U.S. Department of the Treasury, Harvard University and the University of Sydney, found advantages to audits that include the following:

● For every dollar that the IRS spends auditing taxpayers above the 90th percentile of earners, it yields more than $12 in revenue, and audits for below-median income taxpayers yield $5 in revenue for every dollar spent;

● The IRS estimates that there are more than $500 billion unpaid tax obligations each year—what the IRS refers as the “tax gap”—and those obligations are mostly among the top earners. When the IRS audits those earners, it is able to capture some of that unpaid tax revenue; and

● Getting audited tends to induce taxpayers to increase the amount they pay in taxes, voluntarily, for roughly a decade and a half.

“For every $1 an audited person pays during their audit, they pay $3 more on their taxes in the subsequent years,” co-author Nathaniel Hendrena of Harvard wrote in part 5 of a thread on Twitter.

The paper’s findings are consistent with findings by the U.S. Government Accountability Office (GAO) and the reasoning for increased funding to the agency under the Inflation Reduction Act. Part of that allocation, which has been reduced by the recent agreement to suspend the debt ceiling, was intended for increased enforcement of uncollected taxes.

“We show that audits lead to an increase in future taxes paid that persists over the 14 years we observe in the data,” the paper states. “In present discounted value, these additional taxes are 3.2 times the revenue raised from their initial audit.”

The authors noted in their conclusion that “the analysis here is restricted to IRS in-person audits of individuals. While our work captures audits of individual income generated by businesses, future work should further examine the returns to auditing businesses themselves.”

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