Fewer IRS audits will target tax credit claims

Associated Press

WASHINGTON — The Internal Revenue Service’s audit rate is falling no longer, but the average taxpayer still faces long odds in being audited.

Last year, about one out of every 173 returns was subject to an audit. More than half of the returns audited in 2001 involved lower-income people who claimed the earned income tax credit.

In a separate report Thursday, the IRS said that as much as $10 billion in claims for that credit should not have been paid in 1999.

The reports come as millions of Americans prepare for this year’s tax filing deadline, which is April 15 for most of the country. Through Feb. 22, about 38.9 million returns have reached the IRS.

The audit rate for the 127 million individual tax returns filed in 2001 was 0.58 percent, a slight increase from 2000. Most audits were done through the mail, with a little more than 202,500 of the returns requiring an IRS agent to meet with the taxpayer.

In contrast, more than 1.6 percent of all returns were audited in 1996, including almost 762,000 where a taxpayer had to visit an IRS agent.

IRS Commissioner Charles Rossotti said the agency had stopped the slide in audits mainly by hiring 1,301 workers — the first such new hires in six years. The agency also has struggled to implement new taxpayer rights and other changes mandated by a 1998 reform law passed by Congress.

"Clearly, more work needs to be done, but this represents a good step toward a tax system where everyone pays a fair share," Rossotti said.

Some details from the audit report:

The total number of individual returns audited last year was 732,000, up from 618,000 in 2000 but far below the 1.9 million audited in 1996. The 2000 audit rate was 0.49 percent, or about 1 of every 204 returns.

The audit rate for taxpayers earning over $100,000 a year was almost 0.80 percent. For those under $100,000, it was 0.55 percent.

About 15 percent of corporations with assets of $10 million and up were audited. About 0.60 percent of corporations with assets of less than that faced an audit.

The IRS has more than 13,000 revenue agents and tax auditors. That compares with more than 18,400 in 1995.

Levies imposed to enforce tax collections in 2001 came to more than 447,000, far more than the 219,800 of a year earlier but below the recent high of 3.6 million in 1997. Similarly, tax liens last year came to more than 428,000, an improvement over the 287,500 of the year before but almost half of the nearly 800,000 in 1995.

The IRS report on the earned income tax credit, which benefits low- and moderate-income working families, estimated that up to 32 percent of all claims in 1999 should not have been paid. A similar report on 1997 returns estimated that up to $7.8 billion, or as much as 25 percent, of the claims should not have been paid.

The biggest reason involves taxpayers who claim a child that does not qualify, frequently because they do not meet residency requirements. Other errors involve income reporting and people who don’t use the proper filing status.

Rep. Ernest Istook, chairman of the House Appropriations subcommittee overseeing the IRS, said the earned income credit program was "a mess."

"This ruins all our work on welfare reform if we don’t close this backdoor to fraud under the false label of compassion," said Istook, R-Okla. "The amount being wasted is huge, and it’s wrong."

In a joint statement, the Treasury Department and the IRS said a task force is examining problems in the credit program, including ways of reducing its complexity. The statement also said last year’s big tax cut included some changes regarding how children qualify that could help tackle the problem.