Tax Audits Rise in ’03 as IRS Turns Up Heat

The Internal Revenue Service flexed its financial muscles last year by auditing more high-income taxpayers in a stepped-up effort to snare tax cheats, the agency said Thursday.

After years of cutting enforcement activity to focus on making itself more customer-friendly, the IRS has vowed to hire thousands of new auditors and criminal investigators to review corporate finances, high-income taxpayers and offshore tax evasion schemes.

The IRS said its more-aggressive efforts should allow it to capture some of the $250 billion in revenue lost each year.

The IRS audited 139,379 taxpayers with incomes of more than $100,000 in fiscal 2003, a 24% increase from the prior year. Overall, audits of all taxpayers jumped 14% to 849,296, yielding $35.5 billion in revenue.

IRS Commissioner Mark W. Everson said the reduction in enforcement efforts had sent the wrong message to taxpayers.

“This drawing down of enforcement [staff] has had a negative effect” on the public paying taxes, Everson said. “People have seen others get away with things they shouldn’t have been able to,” he said.

The IRS was required by Congress in 1998 to improve customer service after the agency was alleged to have violated taxpayer rights.

But as the IRS pushed to improve service, its ability to nab violators through audits tumbled.

The IRS cut its enforcement staff to 19,285 in 2003, a drop of more than 25% from 1996, while boosting its taxpayer service division.

Even with its stepped-up enforcement activity, the IRS audited only 1.1% of those earning more than $100,000 last year, down from 3.2% in fiscal 1996. And among all taxpayers, only 0.7% had their tax returns reviewed, down from 1.7% in the mid-1990s.

“[Audit rates] are still too low,” Everson said. “We need to do more and continue to increase it, particularly on the big income area. But I don’t think it’s necessarily the case that audits need to return to rates of 10 or more years ago.”

In an effort to get tougher on tax evaders, the Bush administration has proposed increasing funding for the IRS in fiscal 2005 by 4.9% to $10.7 billion, with most of the increase aimed toward focusing on high incomes and corporations.

If the budget request is approved by Congress, the IRS could add 5,000 more enforcement jobs next year.