For tax evaders, this might be a golden age.
Taxpayers are half as likely to be audited by the Internal Revenue Service as they were 10 years ago. The audit rate has fallen to 0.45% in fiscal year 2019, down from 0.9% in 2009.
Even the rich are getting a pass. Audit rates for taxpayers who make more than $1 million a year fell 50% between 2010 and 2018, according to an analysis by Syracuse University.
Why is the audit rate dropping?
The IRS simply doesn’t have the budget and resources to perform as many audits, said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a think tank that analyzes government budget policies.
“There’s been an attempt to cut the IRS’ budget since 2010,” he said. “It’s been a concerted effort and severely depleted the IRS’ resources.”
In 2018, the IRS’ budget was $11.4 billion, 20% less than in 2010, according to the Congressional Budget Office. The agency’s workforce has also shrunk by 22% in the same time.
The biggest cuts to the IRS have been in enforcement, the department that performs audits.
How audits makes the government money
Audits often turns up thousands, if not millions of untaxed dollars, which is then returned to the government, said Marr.
In other words, “you’re spending money to raise money,” he said. “The government is getting back way more than they spend.”
In 2010, audits of millionaire taxpayers turned up $5.1 billion in unreported taxes. In 2018, the IRS uncovered only $1.9 billion in unreported taxes, according to data compiled by Syracuse University. Fewer audits means more money stolen from the government — and from hardworking, law-abiding taxpayers, said Marr.
“People who are honest and pay their taxes have a stake in it,” he said.
What happens if I’m audited?
While audits are rare, they can still happen.
If you’re audited, it means the IRS decided to reexamine your tax filing and verify your income and deductions are legitimate. Audits typically occur when something seems out of the ordinary — like your income doubled in the past year or you suddenly report $100,000 of charitable contributions. Typically, the IRS will ask for more information or additional documentation. Some audits are more in-depth, requiring an in-person visit.
Tax evasion, or intentionally evading your taxes, is a felony offense. In addition to paying whatever you owed in taxes, the IRS may additionally fine you up to $100,000. Tax evasion can also carry a prison sentence of up to five years.
Here’s the likelihood you’d get audited based on your income (based on fiscal year 2018 numbers):
- $1 to $24,999: 0.69%
- $25,000 to $49,999: 0.48%
- $50,000 to $74,999: 0.54%
- $75,000 to $99,999: 0.45%
- $100,000 to $199,999: 0.44%
- $200,000 to $499,999: 0.53%
- $500,000 to $999,999: 1.1%
- $1 million to $4.9 million: 2.21%
- $5 million to $9.9 million: 4.2%
- Over $10 million: 6.7%
The best way to avoid an audit? Don’t intentionally lie on your taxes, and keep proper documentation of the past three years in case the IRS asks for more information. We have a complete guide to filing taxes in 2020 here.
And if you ... hypothetically ... are interested in tax evasion, we have a guide.
Image: Kean Collection