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IRS Audit Coverage Declines

IRS Exam staffing in fiscal year (FY) 2016, the latest tax year with statistics available, reached a 20-year low. As a result, the Treasury Inspector General for Tax Administration (TIGTA) has reported that the IRS undertook fewer audits.

“Examination is a vitally important aspect of maintaining a voluntary tax compliance system because 85% of the Gross Tax Gap is comprised of underreported tax on timely filed returns,” TIGTA reported. Although hiring increased in FY 2016, it did not make up for recent attrition and retirements, TIGTA found. Examination staffing in FY 2016 reached a 20-year low with 8,847 employees, a decrease of 4% from FY 2015 (9,189 employees) and 23% lower than FY 2012 (11,432 employees).

Overall, the number of IRS full-time employees has declined by some 14% since FY 2012. The decline in the number of employees is likely to continue, TIGTA predicted. Approximately 22% of full-time permanent employees in the IRS are eligible to retire, and the IRS expects this number to increase to 34% by 2019, TIGTA found. “Should this loss of staffing be realized, the gap created by the loss of knowledge and experience has the potential to materially affect the administration and enforcement of tax laws,” TIGTA reported.

Audit coverage
Individuals. TIGTA reported that the IRS examined one of every 143 individual income tax returns in FY 2016. This reflected a 16% decline compared to FY 2015 and 30% fewer examinations than the five-year high reported in FY 2012. The IRS examined one in 17 returns in FY 2016 with more than $1 million in income, which, according to TIGTA, is a decline of 29% compared to FY 2015.

Corporations and S corps. TIGTA found that fewer corporate tax returns were examined during FY 2016 than any year since FY 2004. The number of S corporation examinations fell 15% from FY 2015 to FY 2016 (one in every 295 S corporation returns in FY 2016 compared to one in every 248 S corporation returns in FY 2015).

Partnerships. Partnership examinations also declined, TIGTA found. The number of partnership returns examined decreased 24% from FY 2015 to 14,645 in FY 2016. “Due to a focus on partnership examinations in FY 2015, one of every 196 returns filed was examined; however, this number decreased to one of every 263 returns being examined in FY 2016,” TIGTA reported.

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