Increased Staffing and Focus on Tax Fraud Lead to More Prosecutions by IRS, Scholaroo Report Finds

Additional staffing and a post-pandemic focus on tax fraud have led to the Internal Revenue Service (IRS) and its U.S. Sentencing Commission (USSC) prosecuting 53 percent more tax offenders in the past two years, according to a December report from Scholaroo.

The report, which examined tax evasion behavior among Americans, revealed that individuals attempting fraud against the IRS in the states of Pennsylvania, Rhode Island, and Wyoming had the highest chance of getting caught.

Tax Fraud Concentrated Among Wealthiest Individuals

The study also found that while approximately 75 percent of tax fraud is committed by individuals in the middle-income range, the highest incidence of evasion is observed among the wealthiest 5 percent, with an income of at least $200,000. In this elite group, taxpayers hide more than 20 percent of their income from the tax authorities.

Contrary to initial concerns that independent contractors and small-business owners would be targeted by the additional IRS employees, law professor Robert Nassau clarified that making dishonest claims on tax forms can lead to trouble regardless of income level.

Concerns Surrounding IRS Staffing Increase

The Biden administration’s plan to add 30,000 IRS employees over the next two years has raised concerns among taxpayers. The $80 billion funding mandate from the Inflation Reduction Act passed in the summer of 2022 has fueled worries about potential targeting of independent contractors and small-business owners.

However, Nassau emphasized that wealthier individuals engaged in more sophisticated planning are more likely to be audited. He highlighted the importance of accurate reporting and avoiding excessive write-offs to minimize the risk of an audit.

IRS Criminal Investigation and Conviction Rates

In fiscal year 2022, the IRS’s Criminal Investigation team initiated over 2,550 criminal investigations, achieving a 90.6 percent conviction rate on cases accepted for prosecution. The agency has assured taxpayers that audit rates will remain the same for those earning less than $400,000 annually, representing the top 2 percent of income earners.

The IRS’s 2,077 special agents dedicated 70 percent of their time to investigating tax-related crimes, including tax evasion and tax fraud, in 2022. They also devoted a significant portion of their time to money laundering and drug trafficking cases.

IRS Staffing Increase Still Insufficient

Despite becoming more aggressive in combating high-level tax crimes and adding to its ranks, the IRS’s increased staffing is still far below levels from over a decade ago. The agency’s criminal division headcount in 2010 was 40,000, compared to a total of only 3,138 in 2023.

Mark Luscombe, principal North American analyst for tax and accounting for Wolters Kluwer Tax & Accounting, noted that most of the recent additions to the IRS staff are focused on customer service rather than tax fraud convictions. He expressed concerns about the inexperience of the new hires in effectively addressing taxpayers’ questions.

American Perception of the IRS

In a recent Pew Research poll, the IRS emerged as the least popular federal agency among the 16 mentioned in the survey. More than half of the respondents had an unfavorable opinion of the IRS, while only 42 percent expressed a favorable view of the agency.

Despite the negative perception, Nassau emphasized the importance of accurate tax reporting and acknowledged that there are billions of dollars currently not being collected. He urged a reconsideration of the American perception of the IRS’s role.