1 in 8 Millionaires Get Audited by the IRS

The IRS released data this past Thursday that provides some insight into who the IRS targets to audit.  The data showed that 1 in 8 people earning $1 million or over was audited last year by the IRS.  This 12% audit rate was higher than last year, where only 8% of millionaires were audited by the IRS.  The increase in audit rate for millionaires was due in large part to demonstrate that tax laws were applied fairly across the board.   Steven Miller, deputy IRS commissioner for the services and enforcement, stated “That has been something we’ve concentrated on to assure that there’s equity in the system, to assure that those at the lower end of the spectrum know that those at the higher end of the spectrum are subject to the same rules and enforcement as everyone else.”

Comparatively, 1 in 25 people making $200,000 or more and 1 in 100 people making less than $200,000 were audited last year by the IRS.  There seems to be a trend by the IRS to audit larger organizations as well.  Last year, 28% of corporations with assets of $250 million and up  we audited compared to 1% of corporations with assets under $10 million being audited.  The IRS audited almost 1.6 million of the 141 million individual tax returns that were filed.  The efforts have not gone wasted by the IRS, as the audit and enforcement activities netted the organization $55 billion last year.

Affluent taxpayers should consider this increased audit rate when deciding what documentation is needed for their tax positions.  For example, to avoid immediate taxation, certain transfers should occur at the property’s fair market value.  Taxpayers need not necessarily hire an appraiser (like Fulcrum Inquiry, my firm), but this is certainly a good practice.  With the increase in audit rates, it pays to take a more cautious approach with the tax return, including hiring appraisers and other professionals to ensure that the tax positions are supportable.

As evidenced by the substantial results of IRS audit efforts, auditing amounts owed to you is usually a good idea.  Consistent auditing both encourages compliance and generates additional payments of amounts due when rules are not being followed.  This is true whether the entity requesting the audit is owed taxes, royalties, profit participation, or any other amount that is calculated based on revenues, profits or any other performance measures.  See here and here for more information.

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