IRS tax audits plunge as cash-strapped agency's challenges mount

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The odds of being audited by the IRS are shrinking -- and that's especially good news for wealthy taxpayers.

About 934,000 returns were audited during Fiscal Year 2017, the lowest number since 2003, according to new IRS data

Among households with income above $1 million, just 4.37 percent faced audits. That's less than half the 9.55 percent rate in 2015, and the lowest audit rate for millionaires since the IRS first began tracking it in 2004.

The audit rate for taxpayers earning $200,000 or less fell to 0.59 percent, the lowest level since 2002. 

The main reason for the decline: The IRS's budget and staff levels have been under pressure for years. 

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The IRS is also auditing fewer companies and nonprofit organizations. The audit rate for businesses with assets of $250 million tumbled to 15.2 percent in the most recent fiscal quarter, less than half the 33.8 percent rate in 2013.  Less than 1 percent of all tax-exempt organizations were audited in 2017.

"Look, we have a voluntary tax system. It relies on people's goodwill and it relies to some degree on their fear of being audited," said Howard Gleckman, a senior fellow at the Tax Policy Institute, in an interview with CBS. 

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The tax legislation passed in December creates new burdens for the IRS, especially by encouraging some businesses to change their reporting structure. 

"It creates more opportunities for people to claim business deductions than they might have before," said Gleckman. "I don't quite  know how the service is going to keep track of them."

Moreover, Gleckman thinks the rules are so badly written than even taxpayers with the "best of intentions" will "mess-up" because they don't understand" how to comply.

Taxpayers seeking help from the IRS often have difficulties finding it because its staff has shrunk by 20,000 over the past 8 years. The agency's proposed budget is a 1.7 percent increase from last year, but still less than the budget in 2012. 

"This is an unsustainable situation for the agency that brings in 93 percent of the nation's revenue, and it will worsen with additional cuts proposed in the Administration's 2019 budget," said Tony Reardon, president of the National Treasury Employees Union.

An IRS spokesman declined to comment.