IRS Says It's Dramatically Boosting Audits Of The Wealthy

The Internal Revenue Service is auditing tax returns for the highest-earning taxpayers much more aggressively than it has in the past decade, the agency said in a recent report. 

For years, the rate at which the IRS audits the highest earners has fallen as the agency's funding dwindled. However, that trend has reversed in the last seven months, the IRS said in a statement released with an annual report last month.

Between September of last year and May, audit rates have doubled "for taxpayers in every income category above $100,000," the IRS said in a statement. 

Audit rates for incomes between $100,000 and $500,000 have risen to 0.6%, doubling from 2019, the IRS said. Audits for taxpayers making above $10 million in one year increased fourfold, reaching 8%. 

No income category saw a drop in its audit rate, according to IRS data.

The agency also pointed out that audits for high-income taxpayers or those with complicated returns usually start more than a year after the return is filed. (The law allows a tax return to be audited within three years after its filing.) 

For instance, returns for 2019, which taxpayers had to file by May 15, 2020 — or, with an extension, by October 15, 2020 — could be subject to an audit until 2023.

"As new audits of returns filed for recent tax years are opened, audit rates for those years will increase," the statement said.

Rooting out tax shenanigans among the wealthiest remains a priority for the agency, according to the statement, which noted, "Substantially, all experienced field revenue agents are focused on high-income individuals and their related entities."

IRS: Smaller workforce

Still, there's only so much the IRS can do as its funding and workforce have declined. Over the last decade, the number of revenue agents, who conduct in-person audits, has shrunk by 40%, to just 8,300.

The lack of resources means "levels of enforcement activity at the high-end of the distribution, particularly for global high net-worth individuals, large corporations, and complex structures like partnerships are far lower than in the past."

Since the Great Recession, audit rates have been falling across the board, but they have fallen hardest for the richest taxpayers, whose returns are often the most complex and can take the most time to examine. 

It's precisely these people that tend to skip out on paying their fair share, academic research has shown. An estimated $175 billion every year goes unpaid by the top 1% of taxpayers, according to research by Gabriel Zucman and Emmanuel Saez, two leading economists on inequality.

The Treasury estimates that the amount of taxes the richest people and corporations avoid paying every year is equal to all the taxes the government collects from the bottom 90% of taxpayers.

"We are, quite simply, outgunned," IRS Commissioner Charles Rettig told Congress recently.

The agency has relied more and more on audits done by mail, which are easier to do but skew toward lower-earning people. An analysis in March from the Transactional Records Access Clearinghouse at Syracuse University found that the IRS audits people earning less than $25,000 year at five times the rate of everyone else.

First published on June 3, 2022 / 4:28 PM

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