Downside of wealth: More tax audits
The IRS has increased the rate of audits, and nearly 30% of the very rich got their returns examined in 2011. That compares with 1% of taxpayers overall.
This post is by Richard Rubin and Margaret Collins of Bloomberg.
The Internal Revenue Service in 2011 audited 29.9% of taxpayers who reported more than $10 million of income, according to new statistics.
That’s up from an audit rate of 18.4% in 2010 and 10.6% in 2009 for a group that consists of 0.01% of taxpayers. Overall, the agency’s rate of audits for individual taxpayers stayed constant at 1.1%.
Joe Perry, partner-in-charge of tax services at the accounting firm Marcum in New York, said he has seen a tenfold increase in clients being audited, including at least five under the more intense scrutiny of a new IRS task force that is targeting high net worth taxpayers.
"Those are very time-consuming and costly," said Perry, who represents several clients with incomes exceeding $10 million. "It’s worse than a root canal." (Post continues below video.)
The IRS statistics cover audits conducted in fiscal 2011, which generally corresponds to returns filed during 2010.
For U.S. taxpayers with adjusted gross incomes between $5 million and $10 million, the audit rate rose to 20.8% from 11.55%. People making between $200,000 and $500,000 were audited at a 2.7% rate.
The IRS is quicker to audit individual returns than in the past, sometimes contacting people within months of their return being filed, Perry said. In some cases, the IRS requires taxpayers to produce and prove every item on their returns, including such things as their children’s Social Security numbers. Perry said his firm has also seen an increase in so-called correspondence audits, where the IRS will send a letter asking a taxpayer to verify a specific item on the return, such as charitable deductions.
In 2009, the IRS created a special unit to examine the tax returns of high-wealth individuals.
"We will take a unified look at the entire web of business entities controlled by a high-wealth individual, which will enable us to better assess the risk such arrangements pose to tax compliance and the integrity of our tax system," IRS Commissioner Douglas Shulman said in a December 2009 speech. "We want to better understand the entire economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise."
More from Bloomberg and MSN Money:
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- Wise ways to spend a tax refund
- Get a do-over on your tax return
- Whistle-blowers get no respect from IRS
- 10 tips to avoid an audit
You know author you are so right. I made 20 million last year and i got audited. I proved to the IRS that i should have only been taxed 15% capital gains taxes because my income is based off stock options my company gives me. I work basiclly for free, only making $1 a year. Good thing i could afford to hire the best accountant in my town. Paying her only $1500 to avoid having to pay 20% more in taxes. Sheese, lay off me tax man!
Seriously, it must be so terribly inconveniencing for the accountants.
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