By Richard Rubin 

WASHINGTON -- The Internal Revenue Service audited just 0.59% of individual tax returns last year, marking the seventh consecutive annual decline as the tax agency copes with smaller budgets and fewer workers.

That total was down from 0.62% the year before and hit the lowest mark since 2002, according to data released Monday.

Audits of the highest-income households dropped sharply, to their lowest levels since the IRS began reporting that data in 2008. In fiscal 2018, the IRS audited 6.66% of returns of filers with more than $10 million in adjusted gross income, down from 14.52% in 2017. Among households with income between $1 million and $5 million, the audit rate dropped from 3.52% to 2.21%.

The IRS released the data as it is trying to persuade Congress to make long-run investments in the agency's technology and enforcement staff. So far, however, key Republicans in Congress remain skeptical, and there are mixed signals about whether the government will reverse the steady decline in tax enforcement.

"I'm not averse to beefing up their budget a little bit but I want to see results," said Sen. John Kennedy (R., La.), who heads the subcommittee that oversees the IRS budget. "I've got a lot of confidence in the new commissioner and in the new secretary, but I'm not into just throwing money at the wall because the bureaucracy says we need more."

President Trump has proposed boosting the IRS's budget by 1.5% for the fiscal year that starts Oct. 1, to $11.5 billion from $11.3 billion, including a down payment on improving the agency's technology.

The administration also is proposing a $15 billion, decadelong increase in IRS enforcement funding, which the agency says would generate $47 billion in additional federal revenue. That net gain of more than $30 billion would come from enforcing existing laws.

The IRS has been shrinking steadily, partly because electronic filing has increased its efficiency. But many of the recent changes have stemmed from Republican spending cuts after they took control of the House in 2011 and after the IRS said in 2013 that it had improperly scrutinized some conservative nonprofit groups.

Adjusted for inflation, the 2019 IRS budget is smaller than in 2000 and is 19% below peak funding in 2010, according to the Government Accountability Office. The agency's workforce declined 4% in 2018 and is now 21% below where it was eight years ago, and the number of examiners that performs audits shrunk 38% from 2010 to 2017, according to the agency's inspector general. Those cuts came as Congress handed the IRS more responsibility to administer the Affordable Care Act and police offshore bank accounts.

Democrats say the IRS budget cuts are disproportionately benefiting high-income households.

"Republicans in the Senate and the House have been very much geared towards a policy that has produced lots of poor people being audited and lots of well-off people basically getting off the hook," said Sen. Ron Wyden (D., Ore.), the top Democrat on the Senate Finance Committee. "It takes more resources. There's no way around it."

Mr. Kennedy said he wants more details on the IRS modernization plans, pointing to the agency's difficulties overhauling its technology.

Sen. James Lankford (R., Okla.) said he wants more updated information on the tax gap -- the difference between taxes owed and taxes paid -- which should be released in the coming months.

"We need to be able to see it and know what we actually could get a return on, from enforcement," he said.

The Congressional Budget Office estimates that an extra $20 billion spent on IRS enforcement could yield $55 billion over the next decade and more beyond that as audits generate revenue. Once the IRS completed staff training and computer upgrades, the government could get as much as $5.20 in additional revenue for every $1 spent, according to CBO.

The agency started 2,886 criminal investigations in 2018, down from 5,234 just five years earlier, according to the agency's inspector general. The IRS criminal investigations unit had 26% fewer special agents than it did in 2012.

The IRS also has fewer employees working to collect taxes from people who already owe. Each collections officer generates about $2 million a year, which means the smaller IRS is leaving $3.3 billion a year on the table, just from collections, according to the agency's inspector general.

Tax experts say the agency's performance could be improved through better taxpayer service and a simpler tax system. So would rules that gave the IRS more information about sources of income -- such as profits from cash businesses -- that they lack now.

Taxpayers are extremely likely to comply with tax rules when the IRS independently has access to information about their finances. Wages reported on Form W-2 almost always show up on tax returns. When the IRS doesn't have withholding payments or information, people are more likely to underreport their income.

"I don't believe the solution is more agents, more audits and more intrusive government into taxpayers," said Rep. Kevin Brady (R., Texas), the top Republican on the House Ways and Means Committee. "I think it's smarter audits."

But the drops in enforcement and the IRS budget have run in tandem, and the nonpartisan estimates from CBO, GAO and the IRS inspector general say reversing the spending cuts would generate money.

"We're just in never-never land here. The IRS has had its capacity to do its job attacked. There's no other way to say it," Rep. Earl Blumenauer (D., Ore.) said at a recent hearing. "They can't keep pace with what they're up against."

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

May 20, 2019 12:10 ET (16:10 GMT)