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IRS Audits 80% More Rich Taxpayers

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Robert Frank at the WSJ looked at the latest audit statistics in the IRS Data Book and discovered that the IRS audited more than 18% of returns with income of at least $10 million. This is an increase of 80% from 2009, when only 10% were audited. Audit rates increased for other income groups as well, though most sharply for the higher brackets.

If you look at the statistics, it’s actually quite fascinating. Every income range in the Data Book showed an increase in audits, though the $10mm or more crowd saw the greatest jump. Here are the increases:

  • No adjusted gross income: -21.0%
  • $1 under $25,000: 21.6%
  • $25,000 under $50,000: 4.3%
  • $50,000 under $75,000: 14.7%
  • $75,000 under $100,000: 12.3%
  • $100,000 under $200,000: 5.9%
  • $200,000 under $500,000: 3.2%
  • $500,000 under $1,000,000: 21.7%
  • $1,000,000 under $5,000,000: 24.7%
  • $5,000,000 under $10,000,000: 53.6%
  • $10,000,000 or more: 73.4%

I think the big story here is the 21% drop in the No adjusted gross income category. While we don’t have the figures for total audits, 6.21% of returns in 2010 had no AGI. When you redistribute those audits to categories that represent a fraction of a percent (0.67% of returns have an AGI above $500,000), then you’ll see big jumps in those numbers.

While it’s convenient to frame this as a “tax the rich” story, the reality is that it makes more sense to audit the rich when there is a reason to audit them. If you assume that it takes the same amount of time to perform an audit, you get more out of a taxpayer in the 35% tax bracket than someone in the 25% tax bracket. You’re paying the revenue officer the same salary regardless of how much revenue he or she brings in. Regardless of your politics, you can’t argue that this strategy is simply smarter.

That said, the IRS has rules explaining how the IRS picks tax returns to audit. I wouldn’t be surprised if all the whistleblowing led to a higher rate of audits in the wealthy.

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17 Responses to “IRS Audits 80% More Rich Taxpayers”

  1. Texas Wahoo says:

    “If you assume that it takes the same amount of time to perform an audit, you get more out of a taxpayer in the 35% tax bracket than someone in the 25% tax bracket.”

    While I agree that higher income earners should be more likely to be audited, I think taht assumption is probably pretty faulty. I’m guessing higher income tax earners tend to have significantly more complicated taxes, what with being more likely to own a home (or two), capital gains incurring stocks, or to have to pay the AMT.

    • Jim says:

      I just meant that if, for example, the taxpayer were to lose a $100 in deductions, then the resulting tax would be higher because he or she is in a higher bracket.

  2. freeby50 says:

    It certainly makes more sense to focus more auditing on the very high income individuals.

  3. billsnider says:

    My goal is to be in the 73.4% audit barcket.

    Bring on the IRS at that time.

    Bill snider

    • Strebkr says:

      I guess at that point, you just call in the accountants and lawyers. Tell them you will be on vacation and to call back when they know something.

  4. Donald says:

    Another reason not to be rich. I sure do pity them rich folks!

  5. zapeta says:

    Hey, if I make enough money to be in the high audit bracket I’m sure I’ll have a tax person that can deal with it.

    • cubiclegeoff says:

      Exactly what I was thinking. If I was that rich, this wouldn’t bother me because I wouldn’t be dealing with it.

      • govenar says:

        You wouldn’t be bothered if your accountant tells you the result of the audit is that you need to pay another $1 million?

  6. MoneyNing says:

    This is great news for the tax accountants I am sure. As everyone mentioned, when you make more than $10 million, you likely have tax specialists dealing with the IRS, hence more fees!

  7. The IRS can go fly a kite. But seriously, this makes sense. The government is going to go after the most potential income. Rich people=opportunities to make more. I’m far from rich, and even I’ve been audited twice!

  8. Shirley says:

    Somehow I don’t think I will ever have to worry about this problem. ;-)

  9. BettyLaVerne says:

    But, the really amazing fact NOT mentioned here is that the folks who were making over 5 million were NOT getting audited , and their rate was so low that it increased by 53%!!

  10. ross says:

    It does make sense to audit wealthy people, because poor people don’t use high paid “creative” accountants. Plus it makes more sense to pick a target that would provide the largest gain with the least amount of work.


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