Millionaires and Corporate Giants Escaped IRS Audits in FY 2018

The latest data from the IRS show an alarming and continued downward spiral in government audits of the wealthiest taxpayers and America's corporate giants. Despite growing income inequality—where the top 1 percent of Americans control much of the wealth in the United States—less and less attention is being given by federal agents and investigators to determine whether these same individuals and businesses properly report their true incomes and pay taxes on these dollars. Billions of dollars are arguably at stake, as is American faith in the fairness of our federal tax system.

Here is what the latest IRS internal management data covering FY 2018 obtained under court order by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University show:

Audits of Millionaires : The current situation here is the most alarming because the latest data reveal that 97 out of every 100 taxpayers reporting over a million dollars of income were not audited last year. And for these millionaires the puny number of IRS audits has been cut in half since 2010 . See Figure 1. In FY 2010, such audits turned up $5.1 billion in unreported taxes. Even then 92 out of every 100 millionaires were not audited. Now with just half the audits, the government uncovered only $1.9 billion in unreported taxes in FY 2018. Few audits means many millionaires escape paying billions of dollars owed the U.S. Treasury.



(Click for larger image) Figure 1. Few IRS Audits of Taxpayers Reporting > $1 Million in Income*

Audits of Corporate Giants : More than half of the 633 largest corporations in the country - those with over $20 billion in assets - were not even audited last year. This is the first year that the audit rate has slipped below 50 percent. As recently as 2010, nearly all such returns (96%) were being examined by IRS . See Figure 2. Audits in 2010 of large corporations (>$250 million in assets) turned up $23.7 billion dollars in unreported taxes. This had dropped in half to just $12.5 billion during FY 2018.



(Click for larger image) Figure 2. IRS Audits Less Than Half of Corporations with $20 Billion or More Assets

Criminal Prosecutions: IRS referrals of taxpayers for criminal prosecution relative to population size have plummeted by 75 percent in the last twenty-five years, dropping by 63 percent in just the last five years. See Figure 3. The number of taxpayers convicted as a result of IRS investigations reached an all-time low in FY 2018 - just 928. And only 530 of these convictions were for tax fraud rather than for other types of offenses such as identity theft, financial institution and investment frauds, money laundering, drug trafficking and organized crime. IRS of course has major responsibility for not only going after tax cheats who don't pay their taxes on legal sources of income, but also for tax evaders that fail to report and pay taxes on illegally gotten gains. See here for more details.



(Click for larger image) Figure 3. Odds of IRS Referral for Criminal Prosecution Has Plummeted

Why Has This Occurred?

For years, Congress has imposed severe funding and staffing cuts on the agency. Then, in December of 2017, Congress enacted sweeping changes to the tax laws through passage of the Tax Cuts and Jobs Act (TCJA) which imposed many new demands on the IRS. Without adequate resources to meet its tax administration and enforcement needs, IRS's efforts to meet these new demands only exacerbated existing problems.

Back in June of 2010 IRS had just over 100,000 employees on the payroll. By June 2018, staffing had fallen by 22 percent to just 79,071 . And despite the additional responsibilities IRS was assigned to implement the 2017 tax changes, IRS had 3,000 fewer employees than it had in June 2017 before this act was passed. See Table 1.

Table 1. Impact of Congressional Budget Cuts on IRS Staffing Employees on Payroll Change Jun-10 Jun-17 Jun-18 '18 vs'10 All IRS 100,887 82,093 79,071 -22% Revenue Agents 13,843 9,674 8,929 -35% Tax Examiners 13,345 11,665 11,039 -17% Criminal Investigators 2,788 2,165 2,048 -27%

Even larger reductions occurred among IRS revenue agents and criminal investigators. Revenue agents dropped by 35 percent between 2010 and 2018, while criminal investigators fell by 27 percent. Experienced revenue agents are of course those required for the examination of millionaires and corporate giants because they have the most knowledge and skills needed to examine these complex returns.

Tax examiners are responsible for the audits of less complex returns filed by individuals, the self-employed and by smaller corporations. While these also dropped, they now outnumber revenue agents because they only declined by 17 percent.

Footnotes

For earlier TRAC report on audits of millionaires by special IRS Global High Wealth (GHW) group, see "Few Millionaires Audited by IRS Global High Wealth Group". Since then the organizational role of the GHW group has been sharply curtailed. It is no longer one of six "industry groups" with its own executive level director. In the recent reorganization of IRS's Large Business & International Division, it now appears only as part of a nonexecutive level lower unit concerned with strategy that also includes "pass through" exam strategies.

For earlier trends see TRAC's 2017 report, "Nearly Half of Corporate Giants Escape IRS Audit in 2017".

The latest available staffing data is through June of 2018. Staffing generally is lower at the end of each fiscal year in September than in June each year because IRS hires additional staff to help out during tax season and its aftermath. To take care of these seasonal effects, June employment figures are used for comparison purposes for prior years as well.