The Audit Lottery

When IRS is not issuing regulations trying to stay on top of what the federal tax law means, it is of course responsible for enforcing the tax laws and collecting the revenue. In that regard, the audit process is its only real weapon. While computers have leveled the playing field somewhat, the agency over the last five years has lost more than 2500 revenue agents. These folks are in the trenches of tax compliance. For the most part, they are losing the battle. For all taxpayer classes, tax audit frequency is dropping. The individual tax audit rate fell to .7% which is about 1 return out of every 143 returns filed. And these audits are not being conducted in a full-blown fashion, but rather are handled by correspondence to a taxpayer focusing on perhaps one or two issues. For business tax returns, the audit rate was .49%, down 17% from last year. Those agents assigned to enforce the criminal tax law have also generated fewer tax cases. In 2016 only 3,395 criminal proceedings were initiated. A loss of some 12% over the prior year. Now enter Donald Trump and his proposal to cut the IRS budget by more than 14% in order to pay for additional funding for the defense budget and it is not difficult to see where audit rates and frequency will go in the next few years. Will paying taxes one day be a truly voluntary donation? They say for every dollar spent on IRS, the agency collects four. The Donald may be missing billions by being stubborn on this funding issue....or is he?