IRS audits millionaires twice as much in 2011

Chances of a future tax audit loom large. Image: Enkhtuvshin’s 5Dmkll/Flickr/CC BY

According to a report from the Internal Revenue Service last week, nearly twice as many millionaires were targeted for tax audits in 2011 as in 2010. That’s right the IRS audits millionaires often

Number of all audits about the same

The overall audit rate in 2011 remained nearly unchanged at 1.1 percent of all taxpayers. Not so, however, for taxpayers who earned between $1 million and $5 million over the year. Twelve percent of taxpayers in those brackets were audited, a five percent leap from 2010.

Higher the income, greater the increase

According to the IRS data, the audit rate increase rose with annual income. Those taxpayers earning between $5 million and $10 million saw their audit rate climb from 12 percent to 21 percent. And nearly one in three — 30 percent — of those taxpayers earning $10 million or more were audited. That only happened to 18 percent in 2010.

Complex returns tempt more audits

Millionaires generally are audited more often than lower-income taxpayers simply by virtue of their more complex returns. They have more to declare and generally income is spread over a variety of sources.

Crackdown on offshore tax shelters

The IRS attributed part of the blame to its crackdown on wealthy taxpayers using offshore accounts to hide income. Currently, the agency is offering another amnesty program for offshore account holders to come clean, pay reduced penalties and avoid prosecution.

Influence of Occupy Wall Street

Given that 2011 was the year of spotlighting the discrepancy between the “1 percent” and the “99 percent,” some are assigning political motives to at least part of the increase.

Timothy Gagnon, an accounting specialist at Northeastern University, said:

“There’s so much controversy about Romney’s low tax bracket and a lot more attention in the press about the millionaires being favored. It seems like the IRS is trying to show that it’s paying more attention to millionaires and that their chance of an audit is higher than the average person.”

Agency revenue-growth?

Gagnon also opined that the IRS needs to generate revenue, and obviously it can make more from auditing a millionaire than from a middle-class taxpayer.

Joe Perry, partner-in-charge of tax services at the New York-based accounting firm Marcum LLP — which boasts many multi-millionaire clients — told Bloomberg that audits of the super-wealthy are very costly for the client:

“Those are very time consuming and costly. It’s worse than a root canal.”

Rates up for almost-millionaires, too

The audit rate also rose for taxpayers making from $500,000 to $1 million. In 2011, 5 percent of these taxpayers were audited, as opposed to 3 percent in 2010.

Rates steady for the middle

The audit rate remained fairly steady for middle and upper-middle earners. Those who made between $100,000 and $200,000 were audited about 1 percent of the time, just as in the previous year. Those who made between $25,000 and $100,000 faced audits less than 1 percent of the time.

Low earners audited more than middle

The audit rate was lower for the middle than it was for those who earned the least. More than 1 percent of taxpayers reporting income of $25,000 or less were audited. Those who reported no income saw audits 3 percent of the time.

[Survive a tax audit with an installment loan]