The IRS released the statement describing its performance in the Fiscal Year 2012. The general results continued last year’s trend.
In the enforcement area, audits of individuals topped 1 million for the sixth year in a row, with a 1.03% coverage rate out of all tax returns filed. Audits in the upper income ranges remained substantially higher than other categories.
With respect to businesses, the IRS increased examinations across all categories of business returns by more than 12% in FY 2012, with the largest increases coming in audits of flow-through entities, which include partnerships and Subchapter S corporations. The examination rate exceeded 20% for the largest corporations.
IRS enforcement was highly profitable for the U.S. government, especially in the area of voluntary disclosures (such as 2009 OVDP, 2011 OVDI and 2012 OVDP). The IRS collected more than $50 billion in enforcement revenue in FY 2012, the third year in a row topping that figure. However, the 2012 numbers were lower than 2010 and 2011, which were unusual years with enforcement dollars helped by large numbers of offshore tax cases coming in. More than 38,000 disclosures of offshore accounts have been made to date through the IRS’ offshore voluntary disclosure programs. In addition, the economic slowdown contributed to lower enforcement figures, as most enforcement dollars collected resulted from audits of returns for years during the slowdown.
In terms of staffing, however, the IRS again suffered from the cuts to its budget by the Congress, despite extensive evidence that investment in IRS enforcement brings disproportionate amount of income to U.S. government. After a nearly flat budget in FY 2011, the IRS’ FY 2012 budget was reduced by $305 million. This reduction affected the level of staffing available to deliver service and enforcement programs. Overall full-time staffing has declined by more than 8% over the last two years, and staffing for key enforcement occupations fell nearly 6% in the past year.
One exception to the staffing problems has been identify theft. In FY 2012, the IRS more than doubled the number of staff dedicated to preventing refund fraud and assisting taxpayers victimized by identity theft, with more than 3,000 employees working in this area. As a result of these increased efforts, the IRS in FY 2012 was able to prevent the issuance of more than 3 million fraudulent refunds worth more than $20 billion, an increase from approximately 1.8 million refunds worth about $14 billion the previous year.
On the service side, the IRS saw continued strong growth in electronic filing by individuals, as the e-filing rate in FY 2012 exceeded 80% for the first time. Taxpayer interest in online interactions continued to increase as well, with web page visits on IRS.gov up nearly 17% to 372 million.
One of the most surprising trends has been the steady increase in criminal investigations and the growth in the conviction rate. The number of criminal investigations for tax and tax-related matters has gone up from the low of 1,269 investigation in 2009 to 1,846 in 2012 – a whopping 45% increase. During the same time, the conviction rate went up from 87.2% in 2009 to 93.0% in 2012. This means that the IRS is not only radically increasing the number of criminal investigations, but also it is more successful in its prosecution efforts.
Overall, 2012 appears to have been a successful year for the IRS, especially with respect to international tax enforcement.