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I.R.S. Audits Middle Class More
Often, More Quickly
By DAVID CAY JOHNSTON
Published: April 16, 2007
Source
Middle-class Americans, listen up: the I.R.S. is
much more likely to audit you this year. Those
caught cheating can expect to pay about $4,100 more
on average in income taxes.
Since 2000, authorities at the Internal Revenue
Service have nearly tripled audits of tax returns
filed by people making $25,000 to $100,000 as part
of a broad change in audit strategy.
Audits of these middle-class taxpayers rose to
nearly 436,000 last year, up from about 147,000
returns in 2000. For these 61 million individuals
and married couples, who make up nearly half of all
taxpayers, the odds of being audited rose from 1 in
377 to 1 in 140.
Kevin Brown, the I.R.S. deputy commissioner for
services and enforcement, said the audits “were out
of whack” in 2000, with far too little attention
paid to the middle class and to the very highest
income generators, those making $1 million or more.
“We try to run a balanced audit program,” Mr. Brown
said.
But even with the stepped-up scrutiny of
middle-income taxpayers, they still are less likely
to be audited than those earning more — and those
earning less.
For taxpayers with incomes above $100,000 the odds
of being audited in 2006 were 1 in 59; above $1
million, the odds increased to 1 in 16. People in
lower income brackets — those reporting incomes
below $25,000 — faced a 1 in 94 chance of being
audited.
The increased focus on the middle class is part of a
broad I.R.S. strategy to deal with a major reduction
in the ranks of the tax police as the population
continues to grow and Congress has made the tax
system ever more complex.
The I.R.S. has fewer than 13,000 revenue agents,
down from more than 17,000 at the peak in 1988.
The core of the new strategy is to audit more
individuals and businesses, even if the examinations
are more cursory. Without more audits, I.R.S.
executive say, people may behave as if no one is
watching.
The I.R.S. more than doubled the number of
individual tax returns audited from 2000 to 2006,
increasing from nearly 618,000 audits to nearly 1.3
million.
Chris Edwards, director of tax policy at the Cato
Institute, a libertarian research and advocacy group
in Washington, said that Congress is driving the
need for more audits. Since 1995, he said, “the
Republicans greatly complexified the tax code,
contributing to tax evasion and making the I.R.S.’s
job more difficult.”
Deputy Commissioner Brown and others said the
strategy of pursuing more audits, even if each one
receives less time and attention, has proved a
success. Tax revenue from enforcement actions, he
said, rose from $33.8 billion in 2000 to $48.7
billion in 2006.
Critics have said the increased revenue from
enforcement actions shows only how widespread tax
evasion has become and how easy it is to find tax
cheating. The I.R.S.’s most recent estimate is that
$290 billion in taxes due were not reported and
paid. But studies have suggested the figure is
higher, mostly from hidden investment gains,
multinational businesses and entrepreneurs.
Individual audits increased up and down the income
ladder. For those making under $25,000, audits rose
from 369,000 to 589,000, with most of the attention
focused on the working poor who applied the earned
income tax credit, a form of negative income tax
aimed at encouraging people with families to work
rather than seek government benefits.
Audits of these taxpayers peaked in 2005, and the
I.R.S. said it expected audits of applicants for the
credit to decline somewhat in the years ahead
because it has refined techniques to identify those
who cheat and the tax preparers who encourage
cheating.
About 15 percent of audits of low-income taxpayers
find nothing amiss, Deputy Commissioner Brown said.
Audits of those making more than $100,000, the 11
percent or so of Americans who pay about 80 percent
of individual income taxes, rose to more than
256,000 from just fewer than 100,000, a jump of 163
percent. The odds went from 1 in 104 to 1 in 59.
At the very top, those making more than $1 million a
year, the data showed that from 2004 to 2006 the
number of audits rose 77 percent, from almost 9,600
to 17,000. But more than half of those audits were
only letters asking for documentation.
The middle class was lightly audited in recent years
because it relies mostly on wage income, which is
reported by employers and from which taxes are
withheld. The I.R.S. has told Congress that it
captures 99 percent of wage income, but only about
70 percent of income in which there is little or no
independent verification of the figures that people
report on their tax returns.
Middle-class Americans most likely to have their tax
returns examined under the new strategy are those
who own a business, even a side business, or are
landlords or have investment income. There is little
or no independent reporting of such income; the
I.R.S. has proposed increased verification and some
withholding of payments to independent contractors
to reduce cheating, but Congress has not moved on
any of those suggestions.
Middle-class taxpayers who file a Schedule C —
freelancers, consultants and very small businesses —
are three times as likely to be audited as those in
the same income group with no such business income.
The I.R.S. is also increasing scrutiny of people
whose returns show they have bought into any of the
growing number of schemes sold by people who teach,
falsely, that wages are not subject to tax. Some
customers of these schemes have received prison
terms of more than 10 years, and the Justice
Department is pursuing civil and criminal cases
against scores of tax fraud promoters.
Blended families are also more likely to be audited.
The I.R.S. said that it is finding that families
created after a divorce, or the death of a spouse,
often have children who are claimed on more than one
tax return.
The I.R.S. reduced audits in only one category —
farms, especially those with income of more than
$100,000. Audits of these larger farms fell by 28
percent from 2,150 audits in 2000 to 1,547 audits
last year. The I.RS. said it cut back because a
growing number found no additional taxes were due.
One problem with the new strategy of more, but less
thorough, audits is that a growing amount of time is
spent on audits that do not uncover any additional
taxes due.
Time spent auditing corporations of all sizes was
virtually unchanged from 2001 to 2006, according to
a recent analysis by Syracuse University’s
Transactional Records Access Clearinghouse. But time
spent on corporate audits that were unproductive
because no added taxes were recommended grew 40
percent.
The I.R.S. acknowledged the accuracy of the numbers,
which were obtained under court order. The agency
said the change was minor, with about 91 percent of
hours devoted to corporate audits recommending more
taxes in 2001, compared with about 88 percent in
2006. |
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