IRS Audit Statistics: An In-Depth Analysis

The Internal Revenue Service (IRS) plays a crucial role in enforcing the nation’s tax laws. One of its primary tools for ensuring compliance is conducting audits, which involve examining tax returns to verify their accuracy and completeness. This article delves into the IRS’s audit practices, providing insights into the number of audits conducted, the factors influencing audit selection, and recent initiatives aimed at addressing disparities in audit rates.

Number of Audits Conducted

According to the IRS Data Book, the agency closed approximately 708,309 tax return audits in Fiscal Year (FY) 2022. This represents a significant workload for the IRS, as it involves reviewing a substantial number of returns to ensure compliance with tax regulations.

Factors Influencing Audit Selection

The IRS utilizes various methods to select tax returns for audit. These methods are designed to identify returns with a higher likelihood of errors or misstatements. Some of the factors considered in audit selection include:

• Income level: Historically, the IRS has audited a larger share of high-income taxpayers compared to those with lower incomes. However, recent data shows a decline in audit rates for high-income earners.

• Earned Income Tax Credit (EITC) claims: Taxpayers who claim the EITC, a tax credit for low- and moderate-income working individuals and families, face a higher probability of being audited. This is because the EITC is often claimed improperly, leading the IRS to focus on verifying its accuracy.

• Mathematical errors: Returns with mathematical errors are more likely to be selected for audit, as these errors may indicate potential misreporting or oversights.

• Information reporting: The IRS matches information reported by taxpayers on their returns with data received from third parties, such as employers and financial institutions. Discrepancies between these sources may trigger an audit.

Recent Initiatives to Address Disparities

In recent years, concerns have been raised regarding potential disparities in audit rates based on race. Research suggests that Black taxpayers may be audited at higher rates compared to other racial groups, even though the IRS does not use race as a factor in its audit selection process.

To address these concerns, the IRS has implemented several initiatives aimed at reducing audit disparities:

• Focus on high-income individuals: The IRS has shifted its focus towards auditing large partnerships and high-income individuals, as these audits tend to yield higher revenue returns.

• Reduced audits for EITC claimants: The IRS has announced plans to reduce the audit rate for taxpayers claiming the EITC and other refundable tax credits.

• Improved residency modeling: The IRS has made changes to its residency modeling system, which is used to determine the eligibility of children for tax benefits. This improvement aims to reduce errors that may have contributed to higher audit rates for Black EITC claimants.

• Pilot programs: The IRS is piloting two alternative EITC case selection processes to explore different methods of identifying returns for audit.

The IRS’s audit program plays a vital role in ensuring compliance with tax laws and generating revenue for the government. While the number of audits conducted has fluctuated over the years, the IRS continues to utilize various methods to select returns for review. Recent initiatives aimed at addressing disparities in audit rates are a positive step towards ensuring fairness and equity in the tax administration process.