ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – IT’S OFFICIAL – THE IRS AUDITS THE LITTLE GUY MORE
By Robert S. Schriebman
On May 17, 2022, a hearing was held before the Subcommittee on Oversight, Committee on
Ways and Means, House of Representatives. Speaking before the Subcommittee was James R. McTigue, Jr., IRS Director of Strategic Issues. Mr. McTigue’s testimony was published in a GAO Report, GAO-22-106032 (May 18, 2022).
The testimony covered audit rates between 2010 to 2019 and the collection of taxes as a result of audits. The audit rates do show that lower-income taxpayers are audited more frequently than higher-income taxpayers. The Report also stated that it is one thing to audit and assess, but quite another to collect on those assessed taxes.
From tax years 2010 to 2019, audit rates of individual tax returns decreased. On average, individual tax returns were audited over three times more often for tax year 2010 than for tax year 2019. Audit rates for taxpayers with incomes of $200,000 and above decreased the most, largely because higher income audits tend to be more complicated and require more audit hours. Although audit rates decreased the most for higher-income taxpayers between 2010 to 2019, the IRS continued to audit these taxpayers at higher rates than lower-income taxpayers. At least this is the official statement by the IRS. However, the statistics prove just the opposite – that the IRS audits the little guy more than the big guy.
Most small audits deal with errors in the Earned Income Tax Credit (EITC). The official GAO Report states that 40% of tax returns are audited by taxpayers reporting $25,000 or less of income. Most of these audits are done internally and the taxpayer is only contacted by correspondence informing the taxpayer that the potential refund has been impacted by errors discovered. On the other hand, only 17% of taxpayers with incomes of $200,000 or greater, face any type of an audit. For taxpayers reporting $5 M or more the audit rate is only 2.35%.
It’s All Relative
It’s all relative. Small taxpayers generate small change while big taxpayers generate big bucks even though they are audited less than the little guy. The GAO Report stated that the average dollar collected for audits of $25,000 or less $5,169. Audits for taxpayers reporting $200,000 or more average $18,263 per audit.
Another reason why large-income taxpayers are audited less frequently is due to the fact that they can afford to fight the IRS and to tie them up in court. The IRS manpower is at its lowest point in decades. They are fewer auditors, and the government is not willing to invest the manpower to challenge the big guy.
The GAO Report found that the IRS only collected about 47% of audit dollars from individual taxpayers in the fiscal years 2011 to 2020. These days, collections are way down and most likely the average dollar collected is than 47%. The IRS has only about 1/3 of tax collectors or revenue officers on hand. Commissioner Rettig continues to hammer Congress for more funds so he can hire more collectors and auditors. Having said this, there is going to be substantial lead time to train these people so they can become competent.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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