Chance of IRS Audit Varies by Income Level

A basic principle of the tax collection system should be fairness. For the system to work, people of all income levels -rich, poor and middle class alike – should get equal treatment from the IRS.

And yet IRS audits are very much skewed toward higher income taxpayers.

That is what the evidence shows. Overall, 1.1 percent of taxpayers were audited in 2011. But the rate of audits varied widely by income level. To be more precise, the rate gets higher for each level of income over $100,000.

For taxpayers with adjusted gross income between $100,000 and $200,000, the IRS audited 1.0 percent of returns last year. The audit rate for incomes between $200,000 and $500,000 was 2.7 percent and between $500,000 and $1 million it was 5.3 percent.

For those with incomes over $1 million, it was even higher. For taxpayers with incomes from $1 million to $5 million, the audit rate was 11.8 percent. This was a very substantial increase from 2010, when the rate for taxpayers in that income category was approximately 7 percent.

For America’s highest earners, with incomes of $10 million or more, the audit rate was higher still. The IRS audited nearly 30 percent of those taxpayers (29.9 percent) last year, up from 18 percent the year before.

The IRS says that the increase in audits of wealthy taxpayers isn’t a matter of targeting them for closer scrutiny. The reason for more audits relates, rather, to the recent offshore account disclosure initiatives. Many people with offshore accounts are high earners.

Source: “Audit rates of millionaires nearly double,” Blake Ellis, CNN Money, 3-23-12