This has to do with the user agent reported by the browser when the site has been added in Tools->Compatibility View Settings.
Experimenting with IE11, I found that if I visit a site normally, the user agent string is:
Mozilla/5.0 (Windows NT 6.1; WOW64; Trident/7.0; rv:11.0) like Gecko
This indicates IE11
If I open my browser's compatibility view settings, and add my domain to the list of those that should render in Compatibility View, this is my UA string:
Mozilla/4.0 (compatible; MSIE 7.0; Windows NT 6.1; WOW64; Trident/7.0; SLCC2; .NET CLR 2.0.50727; .NET CLR 3.5.30729; .NET CLR 3.0.30729; Media Center PC 6.0; .NET4.0C; .NET4.0E)
This indicates IE7
I used this website to give me a cleaner explanation of the data in these UA strings: http://user-agent-string.info/
One interesting thing is that I can still control what mode the page renders in using the x-ua-compatible meta tag. So, if my website makes strong use of x-ua-compatible to force "edge" mode, visitors using IE11 with my domain set to compatibility view will actually render by page in IE11 mode, but will report IE7 to Google Analytics.
For our organization, the reason the IE7 number is inflated is because at one time, it was the practice of our tech support team to advise our users to add our website to their compatibility view settings to avoid issues with our legacy web apps not working in IE8.
Same issue here; tech support telling folks to put our site in compatibility mode becuase that fixed some problem. Of course that sticks, so now we show as having 7% IE7 users in GA. If we scrub our web logs, looking for the "Trident/N" version string instead, we show 0.2% IE7 users. Google still has not fixed this.
Google still has not fixed this as of 2016-11-02 — I can tell the difference between IE7, IE11, and IE11 in compat mode, but GA is (still) reporting that 50% of our IE traffic is from IE7, when I can guarantee that 0% is IE7 because we block it. (we block if we find "MSIE" unless we also find "Trident")