IRS data reveals insights into collections, compliance, and criminals

The IRS collects and analyzes a staggering amount of data to enforce the laws passed by Congress. With an estimated operating budget of $14 billion in fiscal year 2024, the IRS will be responsible for collecting approximately $5 trillion to sustain the operations of the U.S. government during this period.

A comprehensive exploration of the latest IRS data provides insights into compliance, revenue collection, and criminal activities. Publications with fiscal information from the IRS include, most recently, the 2023 Agency Financial Report; Fiscal Year 2024 Budget in Brief; Tax Gap Projections for Tax Years 2020 & 2021; 2023 Annual Report (IRS Criminal Investigation); and the fiscal 2023 IRS Data Book. These documents reveal the complexities of this massive and formidable governmental agency designed with a mission to “provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.”

Taxpayers: Individual taxpayer data accumulated by the IRS is substantial, with digitization a priority. Many taxpayers continue to prefer a paper return and refuse to file electronically. In 2019, on average, Americans incurred an annual cost of $210 and invested 11 hours in the filing process. This contributed to a cumulative expenditure of 1.7 billion hours and $33 billion in associated costs, according to a 2022 research collaboration among Treasury, the Minneapolis Federal Reserve Bank, and a Dartmouth economist, titled Automatic Tax Filing: Simulating a Pre- Populated Form 1040. The study explored the possibility of a prefilled return for items such as wages, interest, dividends, and income from partnerships, similar to that used in over 45 countries. The researchers found that 40%–50% of returns could be accurately prepared through this process, greatly benefiting those who are owed a refund and do not file.

While prepopulated returns are in the development phase, a 2023 IRS pilot program, Direct File, is being tested in 12 states, using a Q&A format similar to that of online tax preparation providers.

Another option, Free File Fillable Forms, introduced in 2008, allows free e-filing and performs basic math but requires taxpayers to understand which of the over 800 tax forms to use. Neither Free File Fillable Forms nor Direct File includes prefilled forms.

The IRS has recently focused on better service for middle- and low-income taxpayers, with more scrutiny for those at higher income levels. Currently, over $10 billion is being pursued by the IRS from high-income taxpayers. In the Service’s first efforts, $38 million was collected from only 175 taxpayers. It is tracking 1,600 multimillionaires owing back taxes, including from the private use of corporate jets, abusive tax shelters, and digital asset transactions. Within a few months of focused collection efforts, including extra staff, artificial intelligence (AI), and other technology, over $500 million has been collected (see “Study: IRS Could Collect Billions More With Full Funding,” JofA, Feb. 7, 2024).

Collections: Revenue from individual income tax receipts is typically over four times larger than collections from corporate income tax. For all types of taxes, in fiscal year 2023, the IRS collected $4.7 trillion, processed over 275 million returns, and refunded over $659 billion, with a remaining $574 billion in unpaid assessments, according to IRS Publication 5456, Agency Financial Report, featuring highlights of operations for fiscal 2023.

More than 5,000 IRS customer service representatives were hired in 2023 in an effort to enhance customer service. The IRS annually tracks telephone helpline wait times as an indicator of success in its customer service mission. With approximately 8 million phone calls in 2023, the success rate increased for the first time since the pandemic, as helpline wait times declined due to the new hires.

Compliance: Compliance relates to whether taxpayers file their returns accurately and on time. Approximately 15% of taxpayers either underreport, underpay, or do not file, creating a tax gap. For years, the IRS has tracked this noncompliance rate, calculating the difference between what is owed and what is paid timely. The most recent figure available, for 2021, is $625 billion, up 16% from the prior year.

Individual taxpayers comprise over 75% of this amount. Underreported income or inflated deductions cause most of this statistic. To close the tax gap, the IRS has a team of examiners who review accounts through random selection or related to a specific issue or transaction. The audit rate dropped by as much as 40% between 2010 and 2020 due to reductions in IRS funding but is rising as lack of compliance is addressed. The Budget in Brief publication by the IRS states that the current focus for examinations is on taxpayers earning over $400,000 (income before deductions/ losses), a strategy meant to ensure that high-income individuals contribute their fair share.

A 2019 working paper written in conjunction with the National Bureau of Economic Research and authored by researchers from the University of Pennsylvania and the Harvard Kennedy School of Government found that when funding for IRS enforcement is increased, the budget deficit declines exponentially due to increased tax revenues, with the potential for an estimated $1.15 trillion revenue increase between 2020 and 2029. A 2023 study by Treasury and researchers at Harvard and the University of Sydney found that every dollar spent auditing taxpayers in the top 10% of income yielded over $12 in delinquent revenue, compared with $5 for those in the lower 50% of income earners. The researchers identify a “deterrence effect” that continues with increased collections for 10 years after the audit, likely due to concerns about another audit.

Public opinion remains divided. A Harris Poll of over 1,000 adults in 2022 revealed that 57% felt their tax rate was too high compared with others’, with 74% indicating their tax dollars are not properly spent and more than half stating that tax collections were necessary. More than half also agreed that “legal loopholes” should be used, although many felt this approach was the same as committing tax fraud. A majority felt that high-income individuals and businesses would likely be “misleading” about their taxes.

Criminals: Annually, IRS Criminal Investigation reports details of its investigations, including corporate fraud, tax schemes, identity theft, money laundering, and drug trafficking. This law enforcement agency, with a conviction rate of 88% in fiscal 2023, releases regular press releases detailing its role in ensuring potential criminal violations are prosecuted. The 2023 annual report includes specific examples such as the unlawful claim of lottery tickets, software that deletes revenue from point-of-sale systems, and false tax returns. Fraudulent claims involve fuel tax credits, government grant claims, stolen identities, false tax returns, ransomware, money laundering, narcotics trafficking, scams targeting seniors, theft of COVID-19 relief funds, bribery and kickbacks, cryptocurrency crimes, and cybercrimes.

Whistleblowers: In fiscal 2022, the IRS allocated $38 million to whistleblowers, compensating them with 15%–30% of the successfully recovered amount, totaling over $173 million. Since it began in 2007, the Whistleblower Office has paid over $1.1 billion in awards. The Fiscal Year 2022 Annual Report of the IRS Whistleblower Office provides details ranging from types of allegations (unreported/underreported income is ranked No. 1) to closure rates (including 71% of claims denied due to a lack of an “actionable issue”). Individuals wanting to report an “unscrupulous” scheme have other resources for reporting fraud, email/mail scams, tax-exempt organization scams, and phishing. Each has a notification channel to ensure a proper investigation through Form D-3949A, Tax Fraud and Identity Theft Information Report.

New detection tools: Using AI, the IRS can streamline the analysis of the extensive data collected to identify those who have not complied with the law. Recent research underscores the significant return on investment for IRS audits targeting the affluent, emphasizing the valuable information gained from tax-related data. As IRS Commissioner Danny Werfel stated, “If you pay your taxes on time, it should be particularly frustrating when you see high-wealth filers are not” (“IRS Vows New Enforcement Efforts Aided by AI,” JofA, Sept. 8, 2023) . Insights from the extensive data collected by the IRS provide a better understanding of not just the complexities of our system but also the intricacies of this governmental agency.

 — Cynthia E. Bolt-Lee, CPA, M.Tax., is a professor of accounting in the Baker School of Business at The Citadel in Charleston, S.C. To comment on this column, contact Paul Bonner, the JofA’s tax editor.