Wang Solutions

$200,000 is the New Poor in the Tax Audit World

When it comes to tax audits, it’s a given that big fish means more money for the IRS.  That is, digging into the finances of wealthy taxpayers ends up being more worth the time of the agency’s audit teams.  But a recent report on audits from TIGTA, the Treasury Inspector General for Tax Administration, suggests that it’s time to start fishing for even bigger trout when it comes to high-income audits.

That’s because right now a taxpayer has to be making at least $200,000 to enter the pool for high-income tax auditing. When you do the math, which TIGTA did, that’s not enough. TIGTA’s Nov. 20 report found that the IRS can reel in about $605/hour for audits on people who make from $200,000 to $399,999. But audits on people making $600,000 to $799,000 bring in $1058/hour – almost double. The problem is that the IRS dedicates about half of its resources to the so-called poorer wealthy taxpayers, instead of the spending more time on the crowd that results in more money.

Financial holdings aren’t cut and dry when you get up into higher income tax brackets. Amidst all of the complexities that come with lots of moola, the risk that the taxpayers aren’t playing by the book increases. TIGTA recommends that the IRS focus on these folks to maximize return on audit resources. The easiest way to do this is to raise the $200,000 high-income audit line. The IRS is open to making this change, but only after it conducts its own analysis of what resources are going towards which taxpayer income levels. The agency pointed out that productivity alone shouldn’t determine resource allocation.

This is a good point, since while raising the audit income threshold could mean the most bucks at the end of the day for the IRS, it could also encourage the “too-poor” wealthy taxpayers to be a little less careful on their returns if they know the high-income audit spotlight is focused elsewhere. Ultimately, the IRS will need to find a nice balance between where they put resources, what they get out of them, and how to keep taxpayers sticking to the straight and narrow.