IRS income tax audits plummet as agency faces budget cuts

The number IRS audits in 2016 dropped for the sixth straight year, as the agency sheds workers. But it's still a bad idea to cheat on your taxes, say tax experts.

First Look

Americans filing income tax returns this year can worry less about being audited, after the Internal Revenue Service said budget cuts and a reduced staff are to blame for it auditing the fewest number of people in 13 years in 2016.

But tax experts are cautioning Americans not to get overeager.

“I don’t think it’s open season for people to cheat,” Joseph Perry, a partner at the accounting firm Marcum, told the Associated Press. “I think there are a certain group of people that will always try to push the envelope to get away with things that they think they can get away with.”

The lower number of audits the IRS performed in 2016 – down 16 percent from the year before – are part of a six-year trend started by Republicans in Congress. After they took control of the House and Senate in the 2010 elections, Republicans shrunk the agency’s budget from $12.2 billion to $11.2 billion last year, citing the IRS alleged singling out conservative political groups for extra scrutiny when they applied for tax-exempt status in the 2010 and 2012 elections. But the IRS Commissioner, not a part of the controversy, says the cuts are costing the federal government between $4 billion and $8 billion a year in uncollected taxes.

“We are the only agency if you give us more people and money, we give you more money back,” John Koskinen told the AP.

In the face of budget of cuts, the IRS lost more than 17,000 employees since 2010, nearly one-fifth of its total staff. This includes the loss of nearly 7,000 enforcement agents.

The agency has said the budget cuts also contributed to it auditing fewer people over the last six years. The number of people the IRS audited in 2016 dropped to just over 1 million, with 0.7 percent of individuals audited, either in person or by mail. This is the lowest number since 2004, when the United States had about 30 million fewer people.

Wealthier Americans were more likely to get audited in 2016, however. The IRS audited 1.7 percent of returns that reported more than $200,000 in income and 5.8 percent of returns that reported more than $1 million in income. But corporate audit rates were down by 17 percent last year.

Republican lawmakers have defended the IRS cuts, mentioning the alleged mistreatment of conservative groups.

"Go look at all the areas where they've wasted money, mismanaged taxpayer resources," said Rep. Jim Jordan (R) of Ohio. "Not to mention the fact that, you know, one of the reasons we went after them so hard is they did target people for their political views."

But Treasury Secretary Steven Mnuchin, the head of the department that oversees the IRS, acknowledged in his confirmation hearing that the Trump administration understands adding more agents would increase tax revenues.

As this debate will likely continue as federal agencies brace for cuts expected under President Trump's proposed budget for 2017, tax experts have advice for Americans to avoid being audited.

“Even though the chance of being selected for a field audit is statistically very small, if you’re among the not-so-lucky few, it’s a big hassle,” Ray Marti, a practicing financial adviser, wrote in a contribution to CBS News. “The best audit defense is to keep clear and organized records of all deductions and seek the advice of a tax pro if you’re not clear as to whether a deduction is legitimate.”

Sam Brotman, a tax attorney with San Diego’s Brotman Law, added that honesty is the best policy.

"The biggest tip that I can give is to be honest about your deductions and your income," Mr. Brotman told Dan Rafter of the financial blog Wise Bread in an online article. "People who try to game the system are often unclear on how the IRS' statistical methods for auditing work and often end up getting audited anyway."

Mr. Rafter also urged filers to check their math on their returns and be careful with listing deductions.

Other experts agree that making math errors could land you an audit, but so could not reporting an additional income or claiming too many charitable contributions or business expenses, they say.

“Nothing is inherently sinister about a tax audit,” writes Ramona Paden of NerdWallet. “An audit is simply the Internal Revenue Service double-checking your numbers to make sure you don’t have any discrepancies in your return. If you’re telling the truth (and the whole truth), you need not worry.”

This report includes material from the Associated Press.