The Internal Revenue Service is spending too much time and money auditing rich Americans when it should be going after the super-rich, according to a recent report from the inspector general.
The inspector general is urging the IRS to re-evaluate the threshold for high income taxpayers at $200,000 for auditing purposes and instead look at indexing that threshold to inflation.
According to The Wall Street Journal, because the IRS audits less than 1 percent of individual tax returns, it “focuses its resources on areas where there is evidence of noncompliance and a good chance that auditors can collect money for the government.”
In 2014, the IRS audited 1.5 percent of tax returns for Americans with incomes of $200,000 to $400,000 and 12.1 percent of returns for taxpayers with $5 million or more in income.
Auditing taxpayers in the $200,000 to $400,000 income bracket generates about $605 in revenue per audit hour, while the IRS is able to collect about $4,545 per hour auditing the richest Americans. It’s easy to see how auditing the super wealthy quickly adds up.
“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,” said the inspector general’s report.
The IRS maintains that dedicating too much of its auditing resources on super wealthy taxpayers (incomes above $5 million) and dismissing the rich Americans ($200,000 to $400,000 in income) could have potentially costly consequences. The fear of being audited is often a motivating factor to comply with tax regulations.
“Our decisions on resource allocation cannot be made solely on the basis of productivity measures,” Douglas O’Donnell, commissioner of the IRS’ Large Business and International Division, said in a statement. “The keystone of our compliance activities is to promote voluntary compliance, by identifying and working issues that have an impact on changing taxpayer behavior, and also providing a deterrent to other potentially noncompliant taxpayers.”
The IRS is not able to conduct as many audits as in the past because its budget has been slashed by Congress, USA Today reports.
The highest income taxpayers have seen the biggest decline in audit rates. In 2011, 30 percent of tax returns from taxpayers making more than $10 million got a second look by the IRS. In 2014, it was just 16 percent.
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