Why doesn't the IRS make a priority of auditing rich folks' returns?

[slicedalone]

I’m just pulling these numbers out of my nether parts, but I don’t get the excuse that auditing the wealthy uses a disproportionate amount of the IRS resources (i.e., people) to go over them and it’s easier and more efficient to go after smaller fry. If one IRS agent can check my $40,000 income tax return and one more can check your $60,000 return and they can find $1000 worth of underpayment there (1%), how many IRS agents does it take to go over Richie Rich’s $5,000,000 return to find $50,000 worth of underpayment (also 1%)? Surely it’s not as high as 50 agents, is it? That would be the proportionate number of agents to the 2 agents going over our 100,000 income returns.

Sure, we’d cave, you and me, and pay the lousy couple of hundred bucks rather than pay a lawyer to fight the IRS, while Richie would probably have lawyers on retainer but I think it would be so much easier to put up a strong case that the IRS would win to find that they had cheated the government out of $50,000, requiring much less manpower (10 agents? 6?) that they’d come out ahead of the game, and show other RRs that they can’t get away with filing incorrect tax returns routinely.

Maybe it’s just sour grapes on my part–I’m not rich, and don’t plan to be, but I think a more aggressive audit policy for the wealthy would go a long way towards making middle-class people like me far less resentful. Is there a good reason for the IRS to be fearful of auditing the wealthy aggressively while going after small fry like me and you?

[Kent_Clark]

Here’s the IRS’ official take on the OP’s question.
Tax Compliance: Trends of IRS Audit Rates and Results for Individual Taxpayers by Income | U.S. GAO.

The TLDR version is that audits of lower-income taxpayers often center around the Earned Income Tax Credit, which is easy to check (and often calculated wrongly.) However, a much higher percentage of taxpayers with incomes over $500K are audited than those with incomes below that level.

[Tired_and_Cranky]

This is more of an IMHO answer than an FQ one…

It’s hard to push wealthy people with resources to fight and good counsel. Worse yet, if the IRS loses, they will set a bad precedent that will make collecting taxes on the same grounds more difficult or impossible. On a numbers basis, one staffer can close hundreds of fraudulent earned income tax credit cases in a year with some form letters or spend nearly all of 2000 hours fighting one or two wealthy people while having to seek support from other auditors and lawyers in the IRS. If that staffer loses, she has no accomplishments to point to at the end of the year. Or if the case drags on and on, she loses the ability to work on other matters that might help her gain more experience on a wider range of tax issues.

I can see how the incentives form to not go after the very wealthy. That said, I’m sure decisively winning a case like that is a career-making feather in the cap.

[DavidNRockies]

How hard is it to comply with the tax-avoidance strategies that you and those in your stratum actually write or create?

I’m not sure that non-compliance with the tax codes among the wealthiest Americans is the problem. I think the problem is the tax codes themselves.

Do the rich pay their fair share?

I did a quick search and found very little specifically about this. In association with the latest story about DJT’s tax returns, I heard a statistic that the wealthiest Americans pay an average of 24% in Federal Income Tax. I presume they’re talking about Effective Tax Rate. But Effective Tax Rate reminds me of an old joke in medicine: The surgery was a complete success, but the patient died. Sometimes, our definitions differ from the definitions used by others. According to Pew Research: …

[doreen]

Depends on what you mean by “audit” - many audits are done by mail and require almost none of an IRS employee’s time and only a lower-level ( and lower-paid) employee’s time at that. For example, I might have left off 1099 income and the IRS sends me a notice of proposed changes. If agree that I should have reported that income, I just send a check for the additional taxes. Requires almost no time from IRS employees. There are other similarly easy reasons for a mail audit - whether or not I am eligible for a particular tax credit or whether I can in fact claim someone as my dependent. For the most part, wealthy people’s audits aren’t going to be that simple- someone making millions of dollars a year isn’t going to forget that $600 1099 they got for a side hustle or the W2G they got for winning $1200 at a casino. They aren’t going to earn $600 at a side hustle and they will have an accountant to make sure they report the gambling winnings. Their audits are going to involve creative interpretations of rules, to the extent that any evasion is found at all. But the biggest problem from a societal point of view is not that the wealthy cheat on their taxes, but that the tax code allows them to pay “too little” in taxes legally.

[bump]

Both of which seem entirely reasonable, considering that the EITC is basically giving money away, and auditing more people with incomes over 500k makes more sense as well.

@doreen

But the biggest problem from a societal point of view is not that the wealthy cheat on their taxes, but that the tax code allows them to pay “too little” in taxes legally.

I agree. It’s not so much that Bill Gates, Larry Ellison, Elon Musk, Warren Buffett, etc…are evading their taxes. In fact, I’d be willing to bet that everything in their returns is scrupulously legal (why shouldn’t it be; the cost of hiring people to keep it that way is trivial compared to any penalties).

But it’s the system that is flawed; even though what they’re doing is almost certainly wholly legal, it’s not progressive or equitable. I’m not so sure I agree with things like 91% marginal tax rates on the highest income people, but I do think their chunk should be significantly more than the average middle class person’s Federal tax burden. Maybe even some legally fixed percentage above it.

[slicedalone]

@DavidNRockies

the problem is the tax codes themselves.

I’m totally with you on that, but when I read about DJT’s absurd write-off of $70,000 for hair styling as a business expense (my boss wants me to come into the office with my hair trimmed too, but I would never dare to deduct my barber’s fees, or the expense of buying razor blades) I’ve got to believe there’s some chicanery going on there.

I’d like to keep this in Factual Questions if I can because I’m much more interested in how the IRS justifies their policies than Dopers’ opinions on the subject.

[k9bfriender]

@slicedalone

I’d like to keep this in Factual Questions if I can because I’m much more interested in how the IRS justifies their policies than Dopers’ opinions on the subjec

As said, your estimates in the OP are off. It doesn’t take an agent to check your $40,000 tax return, that agent is checking hundreds of returns, in fact, the automation means that most returns are never even seen by a human.

The mistakes made on a $40,000 return are usually simple to detect and correct.

OTOH, a wealthy person’s return may take a substantial team of agents months or years to pour through. Their accountants didn’t make any simple mistakes, and they if there are shenanigans going on, they are obscure and would require comparing data from several different sources to detect.

@bump

In fact, I’d be willing to bet that everything in their returns is scrupulously legal (why shouldn’t it be; the cost of hiring people to keep it that way is trivial compared to any penalties).

I’m sure there is a lot of grey. Lots of things that could be classified one way or another, and the accountants classified it in their client’s favor. An IRS auditor may question it, and if they put enough work into it, they may find it to be an error, in which case, the wealthy individual is out no more than what they owed in the first place. Meanwhile, several other creative accounting entries fly under the radar, and the wealthy person doesn’t owe taxes on those.

Penalties for errors of that sort are nominal if imposed at all.

[bob_2]

Ms Richie Rich can afford to hire accountants that are much better paid than the ones who work for the IRS. Unless they have some reason to be scrupulously honest, their tax affairs will be convoluted and offuscated. Offshore tax havens, under or overvalued property, and sham employees to name but three common ploys. And I have no experience in tax affairs at all.

[griffin1977]

Yeah its a complete travesty that needs to be fixed IMO. You can map the area with the most audits per-capita, and it matches perfectly with the poorest regions of the US.

Its combination of the fact (as others have pointed out) that rich people are harder to audit, and can hire expensive lawyers that poor people cannot. With the fact the the IRS has basically been defunded, so they don’t have resources to go after rich (who of despite being harder to audit will ultimately yield far more revenue in unpaid taxes as we have such unequal economy with so many legitimate and illegitimate tax loop holes for the rich to take advantage of).

Seriously though everyone should be much madder than they are about this.

[slicedalone]

@griffin1977

everyone should be much madder than they are about this

I’m mad enough for about twelve people.

Seriously, this problem seems to be inherent to systems of taxation in general. The rich have far more resources than the poor to tie up the government that challenges their tax returns. Duh?

Seems to me the response to this conundrum should be “Nevertheless we need to tell the rich that they will be punished severely if they try to cheat on their taxes” rather than “We will let the rich get away with murder, sometimes literally, because they have clever lawyers. The poor, on the other hand, we will hound to death because they’re easy pickins.”

When that’s government’s almost-explicit message, you end up with a society where everyone in the country who isn’t wealthy is discontented.

[Czarcasm]

If they make a habit of going after the biggies, the biggies drop a note to the congresscritters they own, and the congresscritters start dropping hints to The Powers That Be at the IRS that their funding is in peril.

[k9bfriender]

@slicedalone

“We will let the rich get away with murder, sometimes literally, because they have clever lawyers.

Don’t forget lobbyists and campaign contributions.

[slicedalone]

@Czarcasm

the biggies drop a note to the congresscritters they own, and the congresscritters start dropping hints to The Powers That Be at the IRS that their funding is in peril.

It occurs to me that someone like Elizabeth Warren or Bernie Sanders probably has an excoriating position paper or two addressing the topic voluminously and I’d be better off writing to one of them rather than asking questions here or beseeching the heavens.

[Falchion]

@k9bfriender

I’m sure there is a lot of grey. Lots of things that could be classified one way or another, and the accountants classified it in their client’s favor. An IRS auditor may question it, and if they put enough work into it, they may find it to be an error, in which case, the wealthy individual is out no more than what they owed in the first place.

I knew a law school tax professor who viewed your tax return as your “opening offer” to the IRS. The IRS could counter, if it wished. And then you would have negotiations, like any other civil financial dispute. I’m not sure how common that outlook is, but it’s certainly going to be labor-intensive for the IRS, with some risk that the taxpayer prevails.

I wonder if there is data on the outcome of audits – both regarding the IRS’ claims and the ultimate outcome.

[DrDeth]

@Kent_Clark

The TLDR version is that audits of lower-income taxpayers often center around the Earned Income Tax Credit, which is easy to check (and often calculated wrongly.) However, a much higher percentage of taxpayers with incomes over $500K are audited than those with incomes below that level.

Yeah. My Bro worked there. Lower level and newer Tax Auditors would crank out 4 or 5 EITC audits a day, each for about $1000. More difficult 1040’, worked by senior Auditors took at least a full days work, but would bring in say anywhere from 0- $10000. However, they were sometimes appealed, which is more time.

Large case, worked by Revenue Agents, could bring in the big bux from small corps or even big corps, but they took lots of staff hours.

And, altho the Agents were NOT graded on dollars per staff hour, the Managers were.

Then there were the constant GOP cuts to IRS budgets, with an obvious “hint-hint” that the more the IRS audited the rich, the more their budgets would get cut.

@Czarcasm

If they make a habit of going after the biggies, the biggies drop a note to the congresscritters they own, and the congresscritters start dropping hints to The Powers That Be at the IRS that their funding is in peril.

Yep. And it worked, since the budget was cut. Mind you, altho I blame the GOP, the Dems usually went along with it.

@Tired_and_Cranky

On a numbers basis, one staffer can close hundreds of fraudulent earned income tax credit cases in a year with some form letters or spend nearly all of 2000 hours fighting one or two wealthy people while having to seek support from other auditors and lawyers in the IRS. If that staffer loses, she has no accomplishments to point to at the end of the year.

Almost right. The line staffer was never graded on that kind of “accomplishments”, but their managers- the ones that assigned the cases- were.

@doreen

Depends on what you mean by “audit” - many audits are done by mail and require almost none of an IRS employee’s time and only a lower-level ( and lower-paid) employee’s time at that.

Compliance did not call those audits, however.

@k9bfriender

I’m sure there is a lot of grey. Lots of things that could be classified one way or another, and the accountants classified it in their client’s favor. An IRS auditor may question it, and if they put enough work into it, they may find it to be an error, in which case, the wealthy individual is out no more than what they owed in the first place.

Yeah, kinda. Grey issues are pretty easily spotted, but if they are grey, no penalties, so we called it playing the Audit lottery. Basically you take something that you know has a 80% chance of being disallowed, but since you have a 2% chance of being audited, and you will owe just what you saved- plus interest- why not play the game? This is what cutting the IRS budget year after year got us.

[bump]

Sure, but I’m not convinced that they’re systematically trying to cheat Uncle Sam. I mean, classifying things in your own (or your client’s favor) is how the game’s played. Everyone does some of that kind of giving themselves the benefit of the doubt, even if they aren’t deliberately trying to cheat.

What I’m getting at is that if they were being taxed at 70% tax rate , a-la AOC’s plan, they’d still engage in all the same shenanigans, but they’d still end up paying more than they would today, if they did everything just-so without any question at all.

[DrDeth]

I also want to point out that when my Bro and I started working there, each two and city had a IRS field office with a Taxpayer Service counter, where you could walk in, get forms, and get help. Calling the 800 number would actually get you a real live person, altho of course during the last couple of days, there would be a hold time.

All that is gone due to cuts.

@bump

What I’m getting at is that if they were being taxed at 70% tax rate , a-la AOC’s plan, they’d still engage in all the same shenanigans, but they’d still end up paying more than they would today, if they did everything just-so without any question at all.

The High tax rates of the past also included tax shelters and what-not.

[Steven_Maven]

I read the following once. I don’t know for sure that it was true then, and even if if was, whether it’s still true now.

IRS Auditors receive their annual evaluation based on the number of audits they complete, not the number of dollars they collect. Therefore, they are “incentivized” to seek the low-hanging fruit of nitpicking many middle class returns instead of the more complex high-income returns, despite potentially higher recovery.

It make sense to me.

[DrDeth]

@Steven_Maven

IRS Auditors receive their annual evaluation based on the number of audits they complete, not the number of dollars they collect. Therefore, they are “incentivized” to seek the low-hanging fruit of nitpicking many middle class returns instead of the more complex high-income returns, despite potentially higher recovery.

No, that is not true. However, having too many audits “over-aged” is definitely a black mark, so they do wanna close their cases with some speed. Auditors do not pick their work anyway.

Okay, here is how cases are selected for audit.
When you file your return, it is graded by the computer. Certain deductions are given more points, compared to your income group. That gives your return a final score. Then when returns are needed for audit, the top scoring returns are selected- and examined by a team of the most experienced auditors- who pick about half of them as 'audit worthy". Those are sent to each district. group etc. The Manager of each audit group assigns the cases to her team, the easy ones (EITC, exemptions, etc) to the newer and lower ranking Auditors- GS5. The middle ones to the GS 7 auditors, then the most difficult- usually schedule C- to the GS 9 senior auditors.

A similar system for Revenue Agents- small C, partnerships to newer agents, etc.

Then of course there are “Large Case”, Fraud, Employment taxes, and other specialized units. One such special unit is the Title 31 Compliance (Anti-money Laundering), which works for FinCEN, but is paid by the IRS- that is where I worked, after a brief stint working tax cases- so I know basic tax law, but not stuff like Employment Taxes, etc. My Bro stayed in taxes.

I used to be able to tell people which deductions got high audit scores (Called “DIF” back in those days)- Office in the home, a Sch C with a loss bigger than the income, casualty losses and the like. This may still be true, but I will not swear to it.