During the 2015 fiscal year, the Internal Revenue Service audited 1,228,117 individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. returns, according to the agency’s 2015 Data Book, released this morning. 0.8 percent of filers were subject to an IRS auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. , or 1 in 120 households that filed a return.
Households with higher incomes were more likely to be audited by the IRS. Almost 35 percent of households with over $10 million in adjusted gross income were subject to an IRS audit in 2015, compared to 0.47 percent of households with between $50,000 and $75,000.
Interestingly, as a household’s adjusted gross income approaches zero, it becomes slightly more likely to be subject to an IRS audit. This is because these low-income households are generally eligible for the Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , a provision that is often claimed fraudulently or calculated incorrectly. According to the IRS, households that claim the EITC are subject to an audit rate of 1.7 percent, compared to 0.6 percent of all other households.
Overall, the IRS audit program resulted in $12 billion in recommended additional taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payments from households in 2015. About 25 percent of these recommended payments came from returns with over $1 million in income, while another 17 percent came from households that claim the EITC. In addition, the IRS recommended a little over $1 billion of additional tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. s in 2015.
In addition to households, the IRS also audits businesses, estates, and trusts. The IRS is particularly likely to audit large corporations: 64 percent of corporations with over $20 billion in assets were under audit in 2015.
This data about the IRS’s auditing activity is not only important to households – who are understandably curious if they will face a tax audit – but also to policymakers, who decide the IRS’s funding level every year. Over the past few years, the Congress has reduced the IRS budget, which has led to fewer audits by the agency. Between 2010 and 2015, the IRS audit rate for households fell from 1.1 percent to 0.8 percent – meaning that about 350,000 fewer households were audited last year than in 2010.Share