Only 30 out of more than 180,000 Millionaires Faced Traditional IRS Audits Last Year

Audit Rates for Low Income Taxpayers Greater than for Top Earners

IRS Says Release of Statistics that Might Explain Aberration "Would Adversely Affect Tax Administration"

After this report was posted this morning (3/28/2006), the IRS contacted TRAC and informed us that the official IRS numbers were not correct. In an effort to understand the reasons for this error, TRAC has requested additional information from the IRS. A follow up report will be posted if it is warranted.

Syracuse, March 28 -- According to new data from the Internal Revenue Service only 30 of the nation's thousands of millionaires were subject to a face-to-face IRS audit in 2005. The very small number selected for the traditional and sometimes intensive audits were drawn from 184,054 individual tax returns reporting a total positive income of $1 million or more.

Figure 1. Click for larger image

Analysis of IRS data by the Transactional Records Access Clearinghouse (TRAC) further indicates that the audit rate for America's wealthiest taxpayers is substantially lower than for the poorest. See Figure 1 and supporting table. For example:

Restricting the comparison to the agency's comprehensive face-to-face audits, taxpayers reporting less than $25,000 in total positive income were six times more likely to be audited than those reporting $200,000 or more in income.

When the simpler and far more common correspondence audits are combined with the face-to-face audits, the poor taxpayers were still almost twice as likely to be audited as the wealthy.

Low income taxpayers also had higher audit rates than middle income taxpayers. See Table 1.

Table 1
IRS Audits of Individual Returns
Fiscal Year 2005

Total Positive Income
Audit Rate
(per 1,000)
<$25,000 8.8
$25,000-$200,000 7.0
$200,000 or more 4.6

The explanation for these curious results is not clear. As far as is known, IRS Commissioner Mark W. Everson has not spoken to this issue. And the release of detailed statistics that might explain the government's strategy -- available to the public for over 30 years -- is now being withheld by the agency.

In a recent filing with a federal judge in Seattle, the government sought to justify the IRS' withholding of the statistical material by quoting unnamed "IRS senior executives" as saying they were concerned that the release "would adversely affect tax administration."

The secrecy was defended in a proceeding where the government is trying to overturn a permanent court order that three decades ago was issued to Susan Long, then a graduate student at the University of Washington. The order required the IRS to provide her with statistical information. Long currently is a faculty member in the Whitman School of Management at Syracuse University and the co-director of TRAC. The case is now before Federal District Judge Marsha J. Pechman.

It is not known whether the very low rate of face-to-face audits for millionaires reported in FY 2005 -- less than 2 out of 10,000 -- is new or whether the policy has been followed in previous years. This is because the IRS has never before provided information about the number of audits for various categories of wealthier taxpayers -- $100,000 to $200,000, $200,000 to $1 million, and $1 million and above. However, there have been other years when analysis has shown that in broad terms low-income individuals were more likely to be audited than rich. One of those occasions was in FY 1999 during the Clinton Administration. A factor contributing to this anomaly was an order from Congress that the IRS reduce non-compliance in the Earned Income Credit program, a special tax benefit for low-income Americans.

While the reason for the small number of IRS audits for the wealthy is not clear, the agency has repeatedly bragged that the overall number of its audits are increasing. Most recently, for example, in a March 17 press release, the agency said that during FY 2005 it had completed 1.215 million audits of individual taxpayers, "up almost 21 percent from last year's figure of 1.008 million."

Table 2
IRS Staff

Employee Type FY 2004 FY 2005 Percent
All employees 94,575 92,289 down 2.4%
Compliance services 48,867 47,818 down 2.1%
Revenue agents/tax technicians 16,231 16,273 up

There are several ways any enforcement agency can increase its performance numbers. One of the easiest is to hire a larger staff. But in the case of the IRS the opposite has happened. Between FY 2004 and 2005 agency data show that the number of employees assigned to "compliance services" declined by 2.1%. The ranks of revenue agents and tax technicians also were little changed. See Table 2.

The agency can also generate more audits with the same staff by focusing on simpler issues handled through correspondence rather than the more time consuming face-to-face examinations. Past TRAC reports found that over the last decade only correspondence audits have grown, while traditional face-to-face audits have fallen. See report and accompanying graph. Indeed, "face-to-face" may be outmoded as a description of field audits. This past year the IRS for the first time chose to change the way it tabulates audits in its annual report. Buried in a footnote, was information that an unspecified number of "correspondence" audits were this year being included in the agency's counts of "face-to-face" audits. With this change, it appears that the actual number of traditional "face-to-face" may be lower than was reported by the agency.

Table 3
IRS Audits of Corporate Returns

Asset Level
FY 2004 FY 2005 Percent
<$250,000 2,784 9,633 246%
<$250,000-$1 million 1,462 3,735 155%
$1 million or more 11,378 13,436 18%

Another way to increase the overall number of audits is to target easier returns which the IRS is then able to process more quickly. This may help explain why low income taxpayers continue to be audited so frequently. It also helps explain why the largest growth in corporate audits this past year has been for the smallest companies. According to the IRS, corporate audits were up by a whopping 69 percent. However, the audits for companies with assets of $250,000 or less increased by 246% over the year before, those with assets of $250,000 to a million increased by 155% while those with assets of $1 million or more increased 18%. See Table 3.

Finally, the IRS can change the definition of an audit in other ways, such as by reducing the number of hours a revenue agent can devote to each. But because the IRS is now withholding information that for many years has allowed the public to answer this and many other questions about the quality of the agency's work, such accountability is not now possible.