TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, April 4, 2011

WSJ: IRS Launches Audit Offensive Against Wealthy Americans

IRS Logo Wall Street Journal, Rich Are Targeted in IRS Audit Offensive, by Laura Saunders:

The IRS is stepping up audits of wealthier taxpayers as part of a multiyear effort to crack down on tax avoidance. According to the agency's latest statistical report for the fiscal year ended Sept. 30, the percentage of taxpayers who were audited increased in every category of AGI above $500,000, compared with a year earlier.

The biggest jumps came at the top of the income ladder. About 18% of Americans earning at least $10 million were audited in fiscal 2010, up from 11% in fiscal 2009, according to the IRS. For those earning $500,000 to $1 million, the audit rate rose to 3.4% from 2.8%. ...

Andrew Mattson, a CPA at Moler, Nixon & Williams in Campbell, Calif., has a redacted copy of a nine-page document request from an IRS "wealth squad" in June 2010 that contained more than 60 detailed questions. Among the demands: details on assets transferred to children or relatives, hedge-fund or private-equity investments, asset appraisals and copies of compensation agreements. 

Here is the data from my prior post, IRS Increased Audit Rate of Richest Americans by 73% in 2010:

The 2010 IRS Data Book released today reports that audits of the highest-income Americans (AGI >$10 million) increased 73.4% in FY 2010:

AGI

FY 2009

FY 2010

100k/200k

0.67%

0.71%

200k/500k

1.86%

1.92%

500k/1m

2.77%    

3.37%

1m/5m

5.35%

6.67%

5m/10m

7.52%

11.55%

>10m

10.60 

18.38%

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Comments

Please, audit the kennedy family, and the rockefeller family, and gates, jobs, allen, buffet, sarandon, robbins, moore, paltrow, pelosi, reid, schummer, etc families.

Defecit solved!!

Posted by: Andrew | Apr 4, 2011 3:00:17 PM

Mr. Caron: Isn't tax avoidance taking perfectly legal steps to lower one's taxes, whereas tax evasion is the use of illegal means? Or am I missing something here?

Posted by: pst314 | Apr 4, 2011 3:02:16 PM

But ... did the take increase? Did it increase more than the cost? At what income levels does a dollar of enforcement bring the greatest return?

Posted by: 30yearProf | Apr 4, 2011 3:31:25 PM

As the tax burden on the low and middle income earners is removed, the wealthly taxpayers are, increasingly, the only ones left to audit.

Posted by: Roadkill | Apr 4, 2011 4:10:26 PM

Cracking down on tax avoidance?

Posted by: Words Matter, Don't They? | Apr 4, 2011 4:11:36 PM

I think the IRS is after anyone with a job that can support a household. I have a mortgage underwater, bankrupt, no job and if you include my wife's retirement we could liquidate and just be indebt about $30,000. Did I mention the IRS is auditing my wife and I for 2008, what a joke.

Posted by: Ken | Apr 4, 2011 4:34:04 PM

It's classic psychological projection. They think since they do it the uber rich are doing it too. Bunch-a damn Nazis is what they are. Abolish the Income tax… it's un-American

Posted by: JimmyNashville | Apr 4, 2011 6:22:23 PM

Since most putatively rich Americans vote Democrat, I do believe an "I told you so" is in order.
So I'll retrieve a life-shortening snack from my inefficient fridge, plop down in my gut-expanding chair stuffed with spotted owl feathers, and indulge myself in a delightful episode of Schadenfreude.
The very prospect elicits a teeth-exposing smile and a gale of giggles.

Posted by: PacRim Jim | Apr 4, 2011 8:42:02 PM

As I recall, if the average amount of money coughed up by the average Obama cabinet nominee were to be applied to the US population in general, we would completely eliminate the national debt.

Therefore all Obama has to do is to make the Cabinet a 300 million seat group. Problem solved. Next!

Posted by: Georg Felis | Apr 4, 2011 9:54:04 PM

Since most putatively rich Americans vote Democrat,

Dead wrong. Most wealthy people (70%) vote Republican.

Wealthy Democrats are a very vocal, visible minority (celebs, etc.). Wealthy Republicans are a discreet, humble majority.

Posted by: GK | Apr 4, 2011 10:11:05 PM

My understanding is that is not a tax code set up for the billionaires. "Wealthy republicans are a discreet, humble majority"...HUMBLE? There is nothing humble about them...hell they feel they are divine humans not like the working slob or the unemployed working slob. Spare me your comparison...really. Humph.

Posted by: deborah | Apr 5, 2011 6:29:05 AM

I thought this blog was read by educated tax geeks and not by the uninformed as the comments seem to indicate. Why audit a small taxpayer where the payoff is small, whereas there is a lot more to work with in tax returns with incomes over $250,000? It only makes sense. Today almost all of the Fortune 500 companies are audited every year and the IRS has an office on their premises. If you don't know that you are living in a cave. Audit roulette still works even for the rich. Why not be agressive? You won't go to jail even if they do audit and find the problem. It works like this....just like when you were a kid or maybe still a kid...."I am sorry, I didn't know it was wrong and I will never do it again"....pay your tax and interest and probably not a penalty and be glad they didn't catch the last 10 years of evading taxes. Happy April 15

Posted by: Sid | Apr 5, 2011 7:53:19 AM

The parasite needs more blood. The IRS, better know as the collection agency for the Fed, knows the bones have just about been picked clean of what's left of the middle class. What folks don't seem to understand, there is not enough money in circulation to pay off the national debt. With an ever free spending Congress I expect to see "civil unrest" in the not to distant future. Ya know the unrest "Jack" Napolitano warned about at DHS

Posted by: robertsgt40 | Apr 5, 2011 8:22:09 AM

The IRS could save a lot of time and money by 'profiling' the worst of the tax cheats, starting with Obama nominees then moving on to democrat politicians, followed by wealthy democrat donors, unions, companies like GE, GM, Goldman Sachs And anyone else who has sold out to the democrat machine and then moving down the chain to anyone associated with the democrats. Heck, this alone would probably close the budget deficit.

Posted by: forrest | Apr 5, 2011 8:53:19 AM

You forgot George Soros, Bill Clinton and Al Gore.

Posted by: Shotgun | Apr 5, 2011 9:37:01 AM

AARP!

Posted by: Sandy P | Apr 5, 2011 4:10:50 PM

I suspect that in political terms this will make conservatives and liberterians out of those who had been apolitical, make apolitical those who had been liberal and fanatic conservatives and liberterians out of those who had been conservative and liberterian.

Posted by: Towering Barbarian | Apr 5, 2011 7:04:10 PM

i'm actually shocked how politically charged the posts here are. I am pretty sure that there are poor republicans, democrats, and independents as well as middle class republicans, democrats, and independents as well as wealthy/rich republicans, democrats, and independents.

As one post noted, you cannot draw blood from a stone (although collection and examination are unrelated functions at the IRS). Generally speaking, those who are poor or middle class are subject to income tax reporting (with the exception of sole proprietorships and other small businesses). People who are not subject to tax reporting cheat more than 50% of the time, so it would make sense for the IRS to limit its examination resources to middle class business (which deal in cash, cook the books, etc.).

Also, if you haven't been alive for the last 24 hours, government is going to have to do more with less. I think "tax avoidance" is a misnomer like "death tax." It is tax cheating (lower than evasion) where the taxpayer attempts to circumvent the Code or bend it into a pretzel to get the result they want (son of Boss anyone?). The wealthy/rich engage in extravagant tax planning. Some of it is novel and there is no law on point so who is to say they are wrong? (Yes, the courts, but I mean at the time they engage in the transaction). Also one man's "loophole" is another man's "benefit." If there is a provision in the Code/Regs that entitles you to the tax benefit you take (depreciation, home mortgage interest deduction, special NOL carryback rules, child tax credit, etc.)

The rich may be income earners, but they have the ability to invest in tax arrangement that provide improper benefits (Hoyt tax shelters, Son of Boss, ect.). The wealthy do not earn income, they live off their wealth. There are entire departments at Big 4 and White Shoe BIGLAW devoted to "wealth management" planning. With a lack of basis reporting (until recently), the government had to accept their reporting as true. Also, there are a lot of grey areas where the ambiguity necessitates examination. And transactions have to be done properly (in the right order; or not as step-transactions).

I don't know why articles like this set people off the way they do. name calling did not help Congress reach a budget deal; it won't help here.

Posted by: tax guy | Apr 9, 2011 6:52:36 AM