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1 1 (October 25, 2023)

handle is hein.crs/govengr0001 and id is 1 raw text is: Congressional Research Service [nforning the Iegitive debate sic. 1914 October 25, 2023 Distribution of IRS Audits by Income and Race The Internal Revenue Service (IRS) enforces the federal tax code. Among the ways it does so is by conducting audits to verify the information on a taxpayer's return is accurate and the correct amount of tax has been paid. Some in Congress have expressed concern about who is audited and how that has changed over time. Less than 1% of individual income tax returns are selected for audit each year. The audit rate has fallen for all income groups since 2010, but it has declined most for high-income taxpayers. While the IRS still audits a greater share of high- income filers than low-income ones, low earners who claim the Earned Income Tax Credit (EITC) face much higher audit rates than other taxpayers with similar incomes. Research also shows that the IRS is more likely to audit Black taxpayers than those of other races, even though the IRS does not collect information on taxpayer race. Background on Audits The IRS selects returns for audit using a variety of methods, including determining the likelihood that there may be an error on the return. Audits generally take one of two forms: correspondence and field. The most common type of audit is a correspondence audit, where an IRS examiner requests information from a taxpayer by mail. Correspondence audits typically target one or several tax items rather than all the information provided on a return. In a field audit, an examiner typically meets a taxpayer at their home or place of business to review their records. Field audits typically examine more tax items in a filing than correspondence audits do. The IRS closed roughly 626,000 audits of individual income tax returns in FY2022, 85% of which were correspondence audits. The agency's National Research Program (NRP) also audits a small, semi-random selection of filers thoroughly to study the nature and frequency of tax nonpayment. As of March 2023, the IRS had audited 0.41% of filed 2019 tax returns, a steep drop from the 0.89% of filers that were audited in 2010. This decline reflects a decrease in appropriations for enforcement at the IRS. Outlays for enforcement, measured in inflation-adjusted dollars, fell by 26% from FY2010 to FY2022. Congress made $46 billion available to the IRS for enforcement activities-in addition to normal annual appropriations-through FY2031 as part of the $80 billion for the IRS and related agencies in the law commonly referred to as the Inflation Reduction Act of 2022 (IRA; P.L. 117-169). Congress subsequently rescinded $1.4 billion of these total IRA funds through the Fiscal Responsibility Act of 2023 (P.L. 118-5). Negotiators also informally agreed to rescind $10 billion from the IRS during both the FY2024 and FY2025 appropriations processes. Secretary of the Treasury Janet Yellen directed the IRS not to use the enforcement funds in the IRA to raise audit rates above historical levels for individual taxpayers with incomes below $400,000 annually. Distribution by Income The IRS generally audits a larger share of high-income taxpayers than those with lower incomes, as illustrated in Figure 1. However, those who claim the Earned Income Tax Credit (EITC)-who typically have low incomes-are much more likely to face an audit than all but the highest- income taxpayers. While the average audit rate for all taxpayers that filed (an individual income tax return or any return) in tax year 2019 was 0.41%, the rate was 0.78% for EITC claimants. Figure 1. Audit Rates by Positive Income, 2019 Returns 2.70% 0.78%. 0.20% ' EITC $1-$2SK $25K-$5OOK $S00K-$IM $IM-$5M >$SM Source: Internal Revenue Service, IRS Data Book, Publication 55-B, March 2023, Table 17, https://www.irs.gov/pub/irs-pdf/p55b.pdf. Notes: Audits of EITC returns are included in the audit rates of taxpayers with $1 -25K and $25K-$500K of income. These figures were published before the three-year statute of limitations on audits ended. The IRS audited a smaller share of filers in 2019 than 2010 at every income level. According to the agency, it did so because of decreased funding (when controlling for inflation), staff attrition, and major disruptions such as a government shutdown and the COVID-19 pandemic. The likelihood that high-income taxpayers will face an audit has fallen by more than the same decline in audit probability for lower-income taxpayers. While the audit rate for those earning over $5 million fell by 86% for returns

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