Audit rates of rich fall, audits of poor spike

Introduction

A generous tax cut was not the only boon wealthy individuals and large corporations received from the Bush administration’s time in office: In recent years, the Internal Revenue Service (IRS) has given their tax returns less and less scrutiny — even as it has stepped up its audit rates among the poor. In 2007, in what the Syracuse University-based Transactional Records Access Clearinghouse (TRAC) calls a “historic collapse,” only 26 percent of corporations holding at least $250 million in assets were audited (compared to more than 70 percent in 1990). Likewise from 1996 to 2006, audit rates of those earning over $100,000 fell by more than one-half, down to 1.3 percent. One contributing factor behind the trend is a slump in IRS staffing: Over the past decade, the number of agents performing audits has fallen by more than 30 percent. Another factor is a 1998 congressional reform bill directing the IRS to focus its audits on those who apply for the Earned Income Tax Credit (EITC) — a credit designed to assist the working poor. By 2006, audits of EITC recipients had risen to account for 40 percent of all investigations. While EITC fraud is a real concern, at a maximum, such fraud accounts for roughly 3 percent of the estimated $300 billion gap between paid and owed taxes. Meanwhile, lighter scrutiny on large corporations and the wealthy — who have the most non-cash income and leeway to game the system — means that those who owe the most also have the best chance of getting away without paying their due. IRS officials have not disputed TRAC’s numbers, but have said they were focusing harder on where noncompliance occurs, especially in private partnerships corporations use to avoid paying taxes. In response to a request for comment, an IRS spokesman noted that in 2007, the agency audited one in 11 tax returns of individuals earning over $1 million, a jump of 84 percent from the year before.

Follow-up:
President-elect Obama has not addressed the audit issue directly, but has indicated that he will give the Department of the Treasury “the tools it needs to stop the abuse of tax shelters and offshore tax havens,” while eliminating “special interest loopholes and deductions.”