The Tax Times: IRS Examinations Decrease Due to Staff Cuts

The Treasury Inspector General for Tax Administration (TIGTA) released its annual report on IRS compliance trends on September 12, 2014.

Individual income tax return examinations conducted by the US Internal Revenue Service decreased in 2013 for the third year in a row, falling to USD1.4 million or one for every 104 tax returns.

Just over 80 per cent were done by correspondence, with only one of every 541 returns being examined in a face-to-face interview. T he number of estate return filings more than doubled, although estate return examinations decreased by 14 per cent. (see our post dated Friday, September 19, 2014, "Estate Tax Audits Are on the Rise"

“Budget reductions contributed to a decrease in the number of examinations and an increase in the number of delinquent taxes being assigned to an inactive status at the Internal Revenue Service last year,” said J. Russell George, Treasury Inspector General for Tax Administration. “However, overall enforcement revenue increased in 2013, due, in part, to several large appeal case settlements.”

Key findings of TIGTA’s report:

1. The Internal Revenue Service’s appropriated budget decreased 7.4 percent between FY2010 and FY2013, from $12.1 billion to $11.2 billion after sequestration.

o The budget cuts resulted in reductions in the number of employees available to provide services to taxpayers and enforce the tax laws.

o The number of full-time equivalents dropped by nearly 9 percent, from 94,618 at the end of FY2010 to 86,310 at the end of FY2013, including a 4 percent reduction between FY2012 and FY2013. The number of enforcement personnel decreased by more than 1,000 employees during FY2013.

2. Total dollars received and collected (gross collections) increased for the third straight year to $2.9 trillion (a 13 percent increase) in FY2013.

o Enforcement revenue collected also increased from $50.2 billion in FY2012 to $53.3 billion in FY2013, due, in part, to several large Appeals case settlements.

o Tax return filings continued to increase as did gross accounts receivable, which increased to $400 billion.

3. The FY2013 Collection function activities showed:

o The amount collected on delinquent accounts by both the Automated Collection System and Field Collection decreased.

o The Collection function continued to receive more delinquent accounts than it closed, although the number of delinquent accounts in the Collection queue decreased, due in part to the shelving of millions of accounts that were not resolved.

o Fewer Notices of Federal Tax Lien were filed, fewer levies were issued, and fewer seizures were made. Meanwhile, taxpayers’ use of payment options such as offers in compromise increased.

The IRS Examination function conducted 6 percent fewer examinations in FY2013 than in FY2012.

o The decline in examinations occurred across all tax return types, including individual, corporation, S corporation, and partnership.

o Another important measure of audit productivity is the percentage of audited tax returns that result in recommended adjustments to the tax return.

o The IRS associates a high percentage of audited tax returns that result in recommended adjustments with greater audit productivity, while audits that result in no change are considered unproductive.

5. Revenue agent examinations of individual tax returns reached a five-year low in FY2011 (8 percent). Since then, the no-change rate gradually increased to 10 percent in FY2013.

6. Tax compliance officer examinations of individual tax returns continued to remain at either 9 or 10 percent between FY2009 and FY2013.

7. Revenue agent examinations of corporate tax returns increased to 29 percent during FY2013.

8. Revenue agent examinations of partnership returns increased during FY 2013 to 47 percent. The no-change rate increased in FY2010 (44 percent) and FY2011 (48 percent) and decreased in FY2012 to 44 percent.

9. Revenue agent examinations of S corporations continue to decrease from 39 percent in FY2011 to 33 percent in FY2012 and 31 percent in FY2013.

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