IRS audits drop, but not on high incomes

• Audit rate for individuals fell 5.3%25 in fiscal 2012
• IRS plans less time auditing businesses with more than %2410 million in assets
• Declines come amid continued IRS staffing decline

U.S. taxpayers were slightly less likely to face an IRS audit last year, according to an analysis issued Tuesday.

The IRS acknowledged that the number of audits of individuals dropped last year, but said examinations of taxpayers with incomes over $200,000 and over $1 million increased in fiscal 2012.

IRS audits dropped 5.3% in federal fiscal year 2012 to 1,481,966 audits of individual tax returns, based on IRS data analyzed by the Transactional Records Access Clearinghouse, a data research and distribution organization based at Syracuse University.

The number of IRS employees fell 4.7% to 90,280 in fiscal 2012, according to the report. And it says the number of audits per 1,000 returns fell from 11.1 in fiscal 2011 to 10.3 in fiscal 2012.

Because of an increase in the number of federal tax returns filed, chances of an IRS audit of an individual tax return fell 7%, TRAC says.

Additionally, TRAC reported the IRS plans to devote 18% less effort auditing businesses with assets of $10 million or more than the tax agency did two years ago. Compared with federal fiscal year 2011, the IRS also projects a 14% drop in the time available for revenue agents to conduct the large business audits, TRAC reported.

The analysis did not account for this year's federal budget sequestration, a budget-cutting process that could further reduce IRS audits.

The decline in the audit rate for individuals was only slightly higher than the reduction in the IRS' overall staffing level. The personnel drop continued a long-term decline that has reduced IRS staffing 23% over the last two decades, TRAC reported.

At least in part, the IRS has compensated for the staffing decline by doing fewer face-to-face audits. The agency has also used computer technology to identify unreported income by comparing amounts taxpayers said they received with amounts reported on financial payment forms.

These less-costly procedures "may well be adequate to deal with many simpler tax situations," TRAC said. But the research organization added that it's less clear "that this computerized audit process can provide adequate coverage for wealthier individuals, many of whom have complicated business or investment income."

"How will both the giant corporations and individual taxpayers respond as the IRS presence recedes?" TRAC asked.

"The IRS is committed to running a balanced enforcement program that delivers appropriate levels of review to individual and corporate tax returns," the IRS said in a written statement.

"Our audits of large corporate tax returns remain at high levels by historical standards. In fiscal 2012, we audited more than 10,700 returns of large corporations representing more than 17% of businesses in this category. The IRS will remain focused on this area in 2013 during a challenging budget period," the agency said.