IRS Audits at 13 year low! To Pay or Not to Pay…

To Pay or Not to Pay, That is the Question

IRS audits are the stuff of terror. They want to look at every detail of your finances and have the authority to make you give up the books or pay the consequences. Even if you did nothing wrong and do not owe a cent in the end, an IRS audit is very time consuming and can be quite expensive from added the bookkeeping and accounting expenses. We see a lot of tax relief customers who owe taxes as a result of audits, so new about audits is very relevant for our visitors. And there is big news.

In 2016 IRS audits on individuals dropped by 16% and dropped by 17% for corporations. These are staggering drops and is raising many eyebrows. Many people and business are pondering,  “is this a great time to fudge on taxes?” Do the math: just 0.7% of people were audited in 2016, which is the lowest rate in 13 years. Better (or worse) yet, the problem is projected to get much worse.

Now add in the federal hiring freeze enacted by President Trump in his first week of office. Compound that with the news that Trump he wants to significantly cut the IRS’s budget – even though it has been clobbered for the last 5 years by Republicans taking revenge on the IRS for its scrutiny of conservative groups, and because the IRS was put in the middle of the Obamacare fight.

The plan to cut the IRS’s funding was revealed last week in documents associated with the White House budget outline. The White House budget office proposed a 14.1% cut to the I.R.S. for the next fiscal year, degrading the IRS’s budget to $9.65 billion. Six years ago the budget was $13.5 billion in today’s inflation-adjusted dollars.

chart of IRS Enforcement Funding from 2010 to 2016

IRS Enforcement Funding from 2010 to 2016

If this reduced budget is approved the cuts would happen when the number of audits is already down and customer service complaints are way up as a result of the drop in funding. Recent data released by the IRS highlights the consequences of the funding problem. Not only has the number of individual tax return audits fallen to its lowest level since 2004, the enforcement staffing levels are down by nearly 30% from 2010!

chart of IRS staff cuts from 2010 to 2016

IRS staff cuts from 2010 to 2016

Criminal investigations related to tax-related identity theft, money laundering, public corruption, cybercrime and terrorist financing also are on the decline as a result of losses to the enforcement side of the agency. Of the more than 17,000 employees lost jobs, nearly 7,000 were enforcement agents.

chart of Count of IRS employees from 1994 to 2015

Count of IRS employees from 1994 to 2015

IRS Commissioner John Koskinen said budget cuts are costing the federal government between $4 billion and $8 billion a year in uncollected taxes. Based on these estimates and when pondering the question of whether to pay, or not to pay, many will be answering that question by rolling the dice and padding their pockets.

If you are thinking about rolling these dice, please pause and think again. The IRS will eventually bounce back, though probably not for many years. Even if they doubled funding to the IRS today, the effects of that on hiring and enforcement would be a couple years down the road due to the glacial pace of government. Still, the statute of limitations on tax collections is 10 years.  That is a long time to be looking over your shoulder. Also, keep in mind that the IRS is less lenient about any tax relief options after an audit where it finds flagrant violations. If you get caught, it will cost you in the end.