The IRS is Being Told to Focus on the Really Rich

by  

Claire Zillman

It will recover more money that way.

The Internal Revenue Service reviews only a tiny portion of all tax returns, but the Inspector General wants the agency to be even more cost-efficient in terms of the audits it conducts—and that means rethinking what “rich” means.

An inspector general report released last week told the IRS that it should spend more time auditing the extremely wealthy and less time looking at the returns of Americans who earn in the $200,000 and $400,000 range.

“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 report.

Audits of returns in that $200,000 to $399,000 bucket garner an average of $605 in extra tax dollars per hours, while audits of returns over $5 million result in $4,545 more.

Courtesy the Treasury Inspector General for Tax Administration

Essentially, the IRS would collect more money if it more narrowly focused its audits on the extremely wealthy.

In 2009, the IRS adopted a strategy focused on addressing noncompliance and improving voluntary compliance among high-income and high-wealth taxpayers who are often involved in complex financial holdings or offshore activity. The Inspector General report said that while “coverage of different taxpayer groups remains important,” the IRS should consider raising the thresholds at which it deems taxpayers “high income” and “high wealth” from the current floor of $200,000 and “reassess its case selection methodology to determine if more emphasis should be given to auditing taxpayers with higher [total positive incomes] to address the higher potential productivity shown for those TPI levels.”

According to the report, IRS management told the Inspector General that its allocation of resources cannot be based solely on productivity measures like tax dollars recovered per hour, but that it will reevaluate its thresholds for high-income taxpayers and consider indexing them to inflation.