Lawmakers are calling on the IRS to stop disproportionately auditing low-income taxpayers, who they say are far more likely than other taxpayers to face IRS scrutiny, with audit rates for poorer filers having nearly doubled over the past two years.
As the April 18th filing deadline approaches, wealthy taxpayers shouldn’t be complacent, despite lower audit rates overall, because political pressure for the IRS to audit more higher earning taxpayers and fewer poor people is growing.
In her letter, Sen. Warren cited data that found that taxpayers making $25,000 or less were audited five times more frequently than all other payers.
Al Drago/Bloomberg
In a letter sent this week to the heads of the IRS and the Treasury Department, Sen. Elizabeth Warren (D., Mass.) and Rep. Judy Chu (D., Calif.) cite the findings of a recent Syracuse University analysis of IRS data that found that taxpayers with $25,000 or less in gross receipts were audited five times more frequently than all other payers, regardless of income level.
Low-income earners were audited at a 1.3% rate last year compared to nearly 0.3% among all earners. Taxpayers with incomes higher than $1 million have a 2.2% audit rate, the highest of any income tier, according to the Syracuse analysis.
But the lawmakers say the high audit rates for low-income payers are worrisome, and are asking the IRS to offer comprehensive data about audit rates over fiscal 2020 and 2021, and to detail a plan “to ensure that low-income taxpayers are not unfairly audited.”
Warren and Chu acknowledge that the IRS faces a limited budget—an issue they say they are working to address—but they stress that the agency needs to marshal the resources it has to audit higher-income taxpayers, in line with a tax-compliance plan outlined by the Biden administration last May.
“We know the IRS suffers from underfunding, and we are working to secure substantial, permanent funding so the IRS can take on the tax cheating of giant corporations and the ultra-wealthy,” Warren and Chu wrote. “But, we also urge you to move swiftly to end the targeting of low-income Americans, in line with the administration’s commitment not to increase audits of taxpayers making under $400,000.”
Analysts with Syracuse’s Transactional Records Access Clearinghouse (TRAC), which draws on IRS data, found that the IRS audit of 1.3% of low-income earners in 2021 was up from 0.79% in 2020. The 2021 audit rate reflected closer scrutiny of filers claiming the Earned Income Tax Credit, but so far in 2022, the IRS is on track to further increase the frequency of audits on low-income filers, according to the Syracuse researchers.
Through February, the IRS is on pace to audit low-income filers at a rate of 13.5 per 1,000, up from 13 per 1,000 in 2021, and 7.9 in 2019, according to the TRAC data. By contrast, the audit rates for all other income levels stood at a projected 2.2 per 1,000 filers in 2022, which would be roughly in line with the past two years: 2.6 in 2021; 2.0 in 2020.
An IRS spokesman declined to comment on the specific points raised in the letter—including that the IRS is defending its audit posture using old data—but pointed to a post on the bureau’s website from Oct. 2020 as an explainer on the issue. Then-Deputy Commissioner Sunita Lough argued: “Despite common misperceptions about IRS examination rates, the reality is that the likelihood of an audit significantly increases as income grows.” Lough cited data from the 2015 tax year in her post.
A spokeswoman for the Treasury Department referred an inquiry to the IRS.
Some of the spike in scrutiny of low-income payers that Syracuse documented can be attributed to so-called correspondence audits, the reviews that IRS personnel initiate with a letter asking for more documentation. More than half of those audits targeted earners with incomes less than $50,000 in fiscal 2019, IRS’ National Taxpayer Advocate.
“These taxpayers often face particular challenges navigating the correspondence audit process,” the IRS’s National Taxpayer Advocate wrote in its 2021 letter to Congress. “The IRS correspondence audit process is structured to expend the least amount of resources to conduct the largest number of examinations—resulting in the lowest level of customer service to taxpayers having the greatest need for assistance.”
The issue of IRS audits of lower-income earners is in large part a question of data. In a House hearing last month, IRS Commissioner Charles Rettig pushed back forcefully against the Syracuse numbers under questioning from Rep. Chu.
“That report by Syracuse University is absolutely, 100% false, and I’m tired of having to deal with this issue,” Rettig said. “We audit high-income taxpayers more than any other category [at] the Internal Revenue Service.”
Rettig said that taxpayers with incomes of more than $10 million face a 7% audit rate. Warren and Chu charged that Rettig, in defending the agency’s audit policies, relied on old data.
Syracuse shot back, as well, noting: “As the commissioner well knew, TRAC’s reporting is based on the actual statistics [the] IRS itself provides to us.”
Warren and Chu are pressing for a full accounting of IRS audits from 2020 and 2021, broken down by income levels and the type of audit, including the correspondence audits. They worry the IRS is relying too much on those remote audits as a low-cost alternative to full-scale audits of more complex returns.
“Given current budget constraints and the rise in correspondence audits, what steps are being taken to ensure that low-income taxpayers are not unfairly audited?” the lawmakers write. “The most vulnerable taxpayers should not shoulder the burden of insufficient IRS enforcement funding simply because they require fewer resources to audit.”
