Tax audits hit a 20-year low — a boon for wealthy Americans

The Internal Revenue Service conducted the fewest number of audits last year in at least 20 years as it continues to suffer from more than a decade of budget and staffing cuts.

The IRS completed just 509,917 tax audits in 2020, or less than a third of the 1,735,083 audits it performed in 2010, according to data by the agency. That’s also the smallest amount dating back to 2000.

Audits of those making above $1 million hit at least a 17-year low of 10,890 — less than a third of the number of audits conducted in 2010.

“You've had decades of devastating budget cuts, and far fewer wealthy people are audited than they used to be,” Chuck Marr, senior director of federal tax policy at the Center on Budget and Policy Priorities, told Yahoo Money. “That should be unacceptable, but the good news is that that's now widely recognized.”

Between 2010 and 2018, the IRS lost over 21,000 employees and its budget was slashed by 20% when taking inflation into account. While its staff and budget increased slightly in 2020, its audit rates continued to fall because there were still significantly fewer employees and training new audit staff takes time.

Last year, the pandemic also hurt the agency’s ability to perform audits because of remote work challenges and backlogs, according to Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center.

“The IRS just ended up with an immense backlog of mail,” she told Yahoo Money. “We're talking about millions of unopened envelopes… They had to rent trailers to store these.”

At the end of 2020, the IRS had a backlog of more than 11.7 million paper returns for both individuals and businesses that needed to be processed, according to a May report by the Treasury Inspector General for Tax Administration. The backlog for individual returns was nearly 20 times higher than at the end of 2019.

The IRS conducts around 70% of its audits by mail, so the backlog significantly slowed the agency down in 2020, according to Holtzblatt.

Internal Revenue Service federal building Washington DC USA
Internal Revenue Service federal building Washington DC. Photo: Getty Creative

‘We do get outgunned’

The decline in audits of the richest Americans is costing the country. The tax gap between what corporations and the wealthy should be paying in taxes versus what the IRS is collecting "could approach and possibly exceed $1 trillion per year," IRS Commissioner Charles Rettig told the Senate Finance Committee in April.

Some of the wealthiest Americans are failing to report more than a fifth of their taxable income by using sophisticated forms of tax evasion to avoid paying Uncle Sam, a 2021 study by the National Bureau of Economic Research (NBER) found, strategies that require many well-trained government examiners to unearth.

"We do get outgunned, I mean there's no other way to say it," Rettig said when asked whether the agency would better pursue corporations and high-income earners if the budget was increased. "I can assure you we're using our resources to the absolute best of our ability, and it's not a dedication or a people issue — it's a numbers issue."

In his American Families Plan, President Biden planned to allocate $80 billion to the IRS for enforcement with the aim to raise $700 billion in revenue over 10 years by minimizing the tax gap. The most recent deal made with Republicans, though, cuts the amount of funding to $40 billion, according to the Washington Post.

The agency faces other challenges outside of funding, too.

For instance, the IRS increased its hiring goals for the 2021 fiscal year, but was unable to hire as many employees as needed. The agency met only 37% of its staffing goal. Too few applicants and problems processing applications delayed hiring, according to the Treasury Inspector General report.

“You can't just defund an agency for 10 years and then throw some money at it, and expect it to rebuild after 10 years of disinvestment,” Samantha Jacoby, senior tax legal analyst at the Center on Budget and Policy Priorities, told Yahoo Money in April.

Yahoo Money sister site Cashay has a weekly newsletter.
Yahoo Money sister site Cashay has a weekly newsletter.

Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova

Read more:

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and Reddit.