The Treasury Inspector General for Tax Administration (TIGTA) released its annual report on IRS compliance trends yesterday. The key takeaway from the report is TIGTA’s finding that the total amount of revenue received and collected by the IRS increased for the third year running, despite the fact that the IRS had fewer employees and decreased funding levels. However, the IRS conducted fewer examinations, and its Collection function continued to receive more delinquent accounts than it closed, the report concluded.
“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.”
Here are the key findings of TIGTA’s report:
- 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. The budget cuts resulted in reductions in the number of employees available to provide services to taxpayers and enforce the tax laws. Specifically, 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.
- Despite these challenges, total dollars received and collected (gross collections) increased for the third straight year to $2.9 trillion (a 13 percent increase) in FY2013. 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. Tax return filings continued to increase as did gross accounts receivable, which increased to $400 billion.
- TIGTA found that the FY2013 Collection function activities showed mixed results. The amount collected on delinquent accounts by both the Automated Collection System and Field Collection decreased. 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. 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.
TIGTA’s report found that IRS Examination function conducted 6 percent fewer examinations in FY2013 than in FY2012. The decline in examinations occurred across all tax return types, including individual, corporation, S corporation, and partnership. In particular:
- Individual Income Tax Return Examinations – The number of individual income tax return examinations decreased for the third straight year. The IRS examined 1,404,931 (one of every 104) tax returns in FY2013. This is approximately 11 percent fewer examinations than the 1,581,394 reported in FY2010 (one of every 90). During FY2013, 81 percent of the examinations of individuals were performed by correspondence. One of every 541 individual income tax returns filed received a face-to-face examination, which is a 4 percent decrease compared with FY 2012, when one of every 522 individual returns received a face-to-face examination.
- Corporate Income Tax Return Examinations – Fewer corporate tax returns were examined during FY2013 than any of the past five years. The number of examinations decreased in FY2013 to a five-year low of 27,480 (one of every 70 returns filed). Also in FY2013, there were fewer corporate tax filings than in any of the last five years (1,912,105). Over the past five years, the number of corporate tax returns examined with assets of less than $10 million decreased 4 percent, from 18,298 in FY2009 to 17,604 in FY2013. These examinations decreased by 17 percent in the past year alone, from the five-year high in FY2012 of 21,164. As examinations of these returns have reached lows, filings have also dropped over the past five years. Corporate tax return filings with assets of less than $10 million have decreased nearly 14 percent since FY2009, with a 2 percent decrease since FY2012.
- S Corporation Tax Return Examinations – The number of S corporation examinations decreased 14 percent from the 21,658 examinations conducted in FY2012. However, the number of S corporation examinations in FY2013 (18,670) was nearly 7 percent more than the number examined in FY2009 (17,455). In FY2012, one of every 206 S corporation returns filed were examined, compared with one of every 240 filed in FY 2013. S corporation return filings increased for the fifth straight year, reaching 4.5 million in FY2013.
- Partnership Return Examinations – The number of partnership returns examined decreased 11 percent to 14,870 in FY2013 after increasing to 16,691 in FY2012. One of every 211 returns filed in FY2012 were examined. This decreased to one of every 239 in FY2013. Partnership return filings increased to 3.6 million in FY2013.
- Other Tax Type Examinations (fiduciary, employment, excise, estate, and gift taxes) – The overall number of examinations in these five classes was 87,836 for FY2013. This is a 13 percent decrease in examinations from FY2012, when the number of examinations was more than 101,000. Each of the five other tax type returns experienced decreases in the number of examinations between FY2012 and FY2013. Excise return examinations decreased by 25 percent and estate return examinations decreased by 14 percent. During FY2012, only one of the five other tax types (estate) experienced decreases in the number of examinations. The return filings increased for all five of these other tax type returns in FY2013. Estate return filings and excise return filings increased 123 percent and 52 percent, respectively.
Another important measure of audit productivity is the percentage of audited tax returns that result in recommended adjustments to the tax return. 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. The no-change rates for:
- 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.
- Tax compliance officer examinations of individual tax returns continued to remain at either 9 or 10 percent between FY2009 and FY2013.
- Revenue agent examinations of corporate tax returns increased to 29 percent during FY2013.
- 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.
- Revenue agent examinations of S corporations continue to decrease from 39 percent in FY2011 to 33 percent in FY2012 and 31 percent in FY2013.
The conclusion to TIGTA’s report is as follows:
The IRS faced many challenges during FY 2013, including implementing provisions related to new tax legislation and operating with fewer resources and employees. Several indicators showed the negative effect of these challenges, including a continued increase in accounts receivable, an increase in the number of cases that might never be worked, and a decrease in the overall number of examinations of tax returns. While some indicators are positive, including increases in gross collections, enforcement revenue, and dollar yield per hour on examinations of corporations, the negative trends continue to be cause for concern, especially given that diminished enforcement could also affect voluntary compliance over time.