NCPA - National Center for Policy Analysis

How Politics Influences IRS Audit Rates

May 8, 2001

The Internal Revenue Service has been branded as a rogue agency, and a nine member IRS Oversight Board was created to rein it in. But experts suggest the agency already suffers from too much political interference.

Over the past 20 years, the percentage of tax returns audited has fallen every year, which the agency claims is due to inadequate funding. One result is that the IRS appears to disproportionately target low-income taxpayers eligible for the earned income tax credit (EITC), designed to help lighten the burden of regressive payroll taxes.

The IRS defends these audits, which are cheaper to administer than devoting resources to examining the returns of well-heeled taxpayers. The complicated calculations necessary to claim the right amount of credit means that an auditor is likely to determine that the EITC filer in fact owes more tax.

Tight IRS budgets may also cause audits to be politically influenced, say Independent Institute scholars. A study forthcoming in the July 2001 issue of Economics and Politics, reports evidence of political influence on the IRS.

  • When the number of revenue agents, the amount of potentially unreported income, and the fraction of filers claiming the EITC are held constant, the percentage of tax returns audited for tax years 1992-1997 was significantly lower in the 33 IRS districts with a congressional representative on one of several key IRS oversight committees.
  • Variation in audit rates across districts may also be partially explained by presidential politics: other things being equal, audit rates (not including correspondence audits due to document mismatching or mathematical errors) were significantly lower in IRS districts that are both rich in electoral votes, and competitive in the popular vote for president.

Source: Marilyn Young, Michael Reksulak and William F. Shughart II, "Politics and IRS Audit Rates," April 16, 2001, Independent Institute, 100 Swan Way, Oakland, Calif. 94621, (510) 632-1366.

 

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