Audit Effectiveness

There has been a lot of political push and pull recently concerning increased funding for the IRS and its ability to carry out audits. Some of this was recently pulled back by Republicans as part of the debt ceiling agreement. Critics of this move claimed that it was for the benefit of the wealthy, and now there seems to be some backup to that.

A recent study based on 710,000 audits from 2010-2014 found that an additional $1 spent on audits of top earners (those above the 90th income percentile) brought in over $12 of revenue. Audits of below-median income taxpayers only yielded $5.

The study states that, “While audit costs rise with taxpayer income, the same is true for audit revenue. In fact, the additional costs stemming from the complexity associated with auditing high-income taxpayers are more than offset by additional revenues."

This definitely seems to legitimize the idea that adding increased funding to the IRS’s audit power more than pays for itself. After all, if you could be guaranteed a 12 times return on investment, you would immediately start moving a lot of money.

And why would you want to take money away from that investment then?

I don’t want to push this any further and get too political, for I can certainly appreciate arguments saying many of these people who would be affected are being unfairly taxed. After all, we are talking about a complicated system that is difficult to make fair to everyone. But I do believe that people should have to fulfill their obligations under the rules in place.

For those still with me, the report’s conclusions state:

“On average, the direct revenues collected by audits surpass the cost by more than 2 to 1, but that ratio varies widely by income. Audits of taxpayers in the bottom 50% of the income distribution do not break even, producing 96 cents for each $1 in cost. Audits in the 70th to 80th percentiles return $1.58 for each dollar in auditing costs; in the 90th to 99th percentiles, audits return $2.18 for every $1, and for audits in the top 0.1%, the return is $6.29.

“The researchers get to the figure of $12 in revenue from the highest-income taxpayers by including the effects of deterrence: Following an audit, people pay more taxes for a minimum of 10 years and a maximum of 14 years. The revenue generated is three times greater than what is collected during the initial audit.”

So even if the idea of an audit is frightening no matter who you are, letting them achieve the desired outcome would seem to be something we could all agree on – especially if they can be so effective. And as always, the best way to avoid a stressful audit is to submit a legitimate tax return.

Warmly,

Josh Bousquet
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