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IRS Audits 80% More Rich Taxpayers

Robert Frank at the WSJ looked [3] at the latest audit statistics in the IRS Data Book [4] 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:

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 [5] 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 [6]. I wouldn’t be surprised if all the whistleblowing led to a higher rate of audits in the wealthy.