In April, the nonprofit investigative news service ProPublica revealed that the IRS spends at least as much time auditing the working poor as it does the wealthiest 1% of Americans. On the surface, that seems fair enough. We shouldn’t avoid auditing the poor just because they’re poor. Neither should we avoid the rich.
Dig a little deeper, though, and it would make a lot more sense to target wealthier people, if the goals are tax compliance and return on investment. After all, a working person’s tax return is usually quite simple. There aren’t a lot of places to hide errors or evasion.
Meanwhile, the wealthy typically file quite complex returns with lots of room for error. So, it’s probably more likely that there would be something to find when auditing a wealthier person. And, if the IRS finds taxes owed, the amount is almost certain to be higher for a wealthier person.
Has the IRS intentionally adopted a policy of skewing its audits toward poorer taxpayers? In response to ProPublica’s findings, Congress asked the agency to explain why it audits so many poor people. The IRS commissioner responded with a report – but no plan for changing anything.
More complex audits are more costly and time-consuming
Over the past decade or so, Congress has stripped away more than 25% of the IRS’s enforcement budget, even adjusting for inflation. This is the underlying reason for skewing audits toward the poor, according to the commissioner.
Audits of the simple tax returns working people submit are often done by mail. They’re also done by less experienced auditors. Conversely, auditing wealthier people’s returns require hours of work by a senior examiner.
Beyond the simple fact that auditing the poor is cheaper, faster and easier, there is the problem of staffing. Because of the budget cuts, there has been a great deal of attrition among examiners with more experience, so the agency is short on those resources. That means it simply can’t audit more complex returns at the same rate.
The IRS says that it simply can’t adjust its auditing priorities without more funding, and Congress has proven reluctant to provide that funding.
What does this mean for you? Your overall income and the complexity of your tax returns are factors in whether you will be audited, but they are not the only factors. While the IRS keeps its red flags secret, tax professionals have an idea of what they are. For example, according to TurboTax, three critical issues that invoke audits include:
- Failing to report all your income
- Failing to properly account for foreign accounts
- Claiming excessive business expenses
If you receive notice of an IRS audit, contact a tax attorney right away.