IRS au­di­tors fo­cus on high earn­ers for more yield

Dis­pro­por­tion­ately tar­get wealthy

The Washington Times Weekly - - National - BY STEPHEN DI­NAN

Tea party tar­get­ing may be out, but wealth tar­get­ing is still very much in vogue at the IRS, where au­di­tors tar­get the wealthy and those with high in­comes at much higher rates than other tax­pay­ers.

While the av­er­age tax­payer faced a less than 1 per­cent chance of an au­dit in the 2014 fis­cal year, those making $200,000 had twice that rate, and the higher the in­come, the more likely the au­di­tors were to take a look.

Those with an­nual in­comes of at least $10 mil­lion had a one in four chance of fac­ing an au­dit in the 2013 fis­cal year, which dropped to a one in six chance by last year, the agency’s in­spec­tor gen­eral said in a re­port late last week.

It’s all very much by de­sign. Wealthy tax­pay­ers are more likely to use com­plex fi­nan­cial ar­range­ments to man­age their money, and au­dits are needed to keep them in com­pli­ance and pay­ing their fair share un­der the law.

But the in­spec­tor gen­eral said the agency needs to home in on whom it con­sid­ers to be high-in­come tax­pay­ers de­serv­ing of spe­cial scru­tiny, to make sure it’s really go­ing af­ter the peo­ple who are hid­ing the most money and where the agency gets the best re­turn on in­vest­ment.

For ex­am­ple, ev­ery hour spent au­dit­ing a tax­payer with $5 mil­lion in in­come finds about $4,545 owed. But au­dit­ing some­one making $200,000 pro­duces $605 an hour.

“Be­cause there are more tax­pay­ers in the $200,000 to $399,999 range than in higher in­come ranges, it ap­pears that the IRS is spend­ing most of its au­dit re­sources on au­dit­ing tax re­turns with po­ten­tially lower pro­duc­tiv­ity,” Deputy In­spec­tor Gen­eral Michael E. McKenney said in the re­port.

The IRS is op­er­at­ing on 2009 data for the def­i­ni­tion of high in­come. Barack Obama used the $200,000 fig­ure in his 2008 pres­i­den­tial cam­paign as a di­vid­ing line for what he deemed wealthy.

Dou­glas W. O’Don­nell, com­mis­sioner at the large busi­ness and in­ter­na­tional di­vi­sion of the IRS, told the in­spec­tor gen­eral that per­son­nel will re­visit their data and fig­ure out whether they need to change the thresh­old for whom they con­sider high-in­come, but he said they won’t stop go­ing af­ter some of the lower-pri­or­ity tax­pay­ers. He said they need all tax­pay­ers to fear au­dits “to pro­mote vol­un­tary com­pli­ance.”

“Our de­ci­sions on re­source al­lo­ca­tion can­not be made solely on the ba­sis of pro­duc­tiv­ity mea­sures (i.e., ‘yield’),” Mr. O’Don­nell wrote in his of­fi­cial re­ply.

In that, it’s the op­po­site of how the Obama ad­min­is­tra­tion has han­dled im­mi­gra­tion en­force­ment, in which de­por­ta­tion agents have been or­dered not to bother with whole classes of il­le­gal im­mi­grants un­der the be­lief that it’s not worth the time and ef­fort.

Ac­cord­ing to the in­spec­tor gen­eral’s re­port, the tax­pay­ers least likely to face au­dits are those whose ad­justed gross in­comes are $75,000 to $99,999. They had a chance of about one in 200 of fac­ing an au­dit in fis­cal year 2014.

Chances rose, how­ever, for those on both ends of the spec­trum. Those making less than $25,000 had a one in 100 chance of be­ing au­dited, while those making $200,000 to $499,999 had a one-out-of-57 chance of fac­ing the tax­man.

Those who filed re­turns but re­ported no ad­justed gross in­come, mean­ing their de­duc­tions can­celed out their in­comes, faced a onein-20 chance of be­ing au­dited.

The au­dit rates have dipped in re­cent years as IRS fund­ing has been cut and the tax agency looks for places to save money. Cus­tomer ser­vice has suf­fered dra­mat­i­cally, with tax­pay­ers’ phone calls reg­u­larly go­ing unan­swered, but the agency also says it is re­duc­ing its num­ber of au­dits.

Still, the agency is mov­ing ahead with plans to re­write the rules on po­lit­i­cal be­hav­iors by non­prof­its — a pol­icy that spawned the tea party tar­get­ing scan­dal, in which con­ser­va­tive groups were sin­gled out for in­tru­sive scru­tiny and lengthy de­lays in get­ting their non­profit ap­pli­ca­tions ap­proved.

The Jus­tice Depart­ment said the tax agency showed poor de­ci­sion-making but de­clined to pursue crim­i­nal charges against the IRS for the tar­get­ing. It said the bad be­hav­ior has been stopped, though sev­eral tea party groups still have not been ap­proved sev­eral years af­ter fil­ing their ap­pli­ca­tions.

AS­SO­CI­ATED PRESS

While the av­er­age tax­payer faced a less than 1 per­cent chance of an IRS au­dit in the 2014 fis­cal year, those making $200,000 had twice that rate, and the higher the in­come, the more likely the au­di­tors were to take a look.

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