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Is Auditing the Wealthy Too Taxing for the IRS? Number of Millionaire Audits Falls as Amount of Millionaire Tax Returns Increases

Everyone knows Benjamin Franklin's adage that nothing in life is certain but death and taxes, but some of the wealthiest Americans may have gotten away with avoiding at least some of their tax obligations according to a recently released review of the IRS' audit rates for millionaires.

The Associated Press reports that the Transactional Records Access Clearinghouse (TRAC), an IRS watchdog based out of Syracuse University, issued the results of a study Monday showing the audit rate for those with incomes of $1 million or above falling to 5.6 percent in fiscal year 2008 from 6.8 percent in 2007.  The overall number of millionaires audited declined from 23,200 to 21,874, according to the study, even as the overall number of millionaires filing tax returns went from 339,138 to 392,776.

The group called the decline in audits "surprising" given the growing federal budget deficit.  The Obama administration has already projected a record deficit of $1.75 trillion for the current budget year, and congressional auditors have warned of deficits totaling $9.3 trillion over the coming decade.

TRAC also claimed that the audit figures clashed with statements made by the IRS last year that it had taken great strides forward in its income tax enforcement, especially for millionaires. 

IRS spokesman Terry Lemons defended the agency's audit record, however, calling the decrease in millionaire audits "slight".  Lemons attributed the decline to budget constraints coupled with the added responsibility of ensuring the timely delivery of stimulus checks.

Lemons also pointed out that the IRS still audits millionaires much more fequently than those in lower income brackets.  "[I]f you are a millionaire you are a lot more likely to be hearing from the IRS," he told the AP.  He also noted the fact that taxpayers with incomes of more than $10 million face an almost one-in-10 chance of an audit.

The audit rate for those with incomes of less than $200,000 remained mostly unchanged at a little less than one percent.  The audit percentage rose slightly for those with incomes between $200,000 and $1 million, from 2.87 percent to 2.94 percent. 

The TRAC report highlighted the importance of reviewing the tax returns of those with high incomes because of the high rates of recovery from those audits.  When a millionaire audit resulted in a recommendation of additional taxes, the average amount suggested after a face-to-face audit was $198,000.  Audits conducted by correspondence resulted in an average additional tax suggestion of $137,000.

Last year was the first year in a decade that the IRS' enforcement revenues dropped, from $59.2 billion in 2007 to $56.4 billion in 2008.

• New Tax Laws for 2009 (FindLaw)
• Transactional Records Access Clearinghouse
• Internal Revenue Service
• How to Reduce the Chance of an Audit (FindLaw)
• IRS Announces Crackdown on Abusive Trusts (provided by the Law Offices of Scott Kauffman)
• Top Ten Tips for Surviving an Audit (FindLaw)

Full post as published by FindLaw's Common Law on March 23, 2009 (boomark / email).