I.R.S. Audits Middle Class More Often, More Quickly
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By DAVID CAY JOHNSTON
THE NEW YORK TIMES
April 16, 2007
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. |
