The IRS Continues To Focus Its Audits On Poor People, Not Millionaires (2024)

FAQs

The IRS Continues To Focus Its Audits On Poor People, Not Millionaires? ›

In 2021, the odds of millionaires being audited were 2.6 of each 1,000 returns. For low-income wage earners, it was 13.0 out of a 1,000. Last year, the number of millionaires' returns out of a 1,000 being audited were down to 2.3, while for the low-income wage earners, it stood at 12.7.

IRS can collect $12 for every $1 spent auditing top earners, research suggests. Research has shown that audits of wealthy taxpayers can pay rich dividends. The cost of an audit tends to rise with the income of the taxpayer targeted, the paper found. But audits of wealthy taxpayers also deliver more tax revenue.

The burden of the IRS audits disproportionately falls on lower-income families, with households making less than $25,000 facing the largest audit scrutiny among other income ranges in 2022, according to data released by TRAC.

“We are working to reverse the historically low audit rates for large corporations, complex partnerships and high-wealth individuals,” IRS Commissioner Danny Werfel said last week. The tax gap, or the difference between taxes owed and paid, was an estimated $688 billion for tax year 2021, the IRS reported in October.

The Examination Division of the Internal Revenue Service is responsible for auditing federal tax returns to determine if income, expenses, and credits are reported accurately. They are very analytical people, mostly experienced CPAs who provide a service to the government.

Audit rates of all income levels continue to drop. As you'd expect, the higher your income, the more likely you will get attention from the IRS as the IRS typically targets people making $500,000 or more at higher-than-average rates.

The IRS audits under 1% of the tax returns it receives every year. Due to limited capacity, the agency can't conduct audits to the extent it may want to. That may be changing this year, though. The IRS has been granted $80 billion in funding as part of the Inflation Reduction Act.

The Internal Revenue Service was 5 ½ times more likely to audit the tax returns of the working poor in 2022 than all other taxpayers, according to a Syracuse University report.

As the report said, “this group of taxpayers have historically been targeted not because they account for the most tax under-reporting, but because they are easy marks in an era when IRS increasingly relies upon correspondence audits yet doesn't have the resources to assist taxpayers or answer their questions.”

Philanthropy pays

Many charitable organizations set up by billionaires are tax-exempt, and charitable donations are tax deductible. You can completely control when to make a donation, and of what size, depending on how much taxable income you have in a given year; it's a nimble method of offsetting taxes.

Has the IRS audited Biden? ›

The IRS has conducted audits on the federal income taxes of President Joe Biden and first lady Jill Biden for the last two years, one of which required the first couple to pay slightly more than originally owed.

For tax year 2024, for family coverage, the annual deductible is not less than $5,550, an increase of $200 from tax year 2023; however, the deductible cannot be more than $8,350, an increase of $450 versus the limit for tax year 2023.

Beginning this week, the IRS will start sending out noncompliance letters to more than 25,000 people who earn more than $1 million per year and 100,000 people with incomes between $400,000 and $1 million who failed to pay their taxes between 2017 and 2021.

Returns with extremely large deductions in relation to income are more likely to be audited. For example, if your tax return shows that you earn $25,000, you are more likely to be audited if you claim $20,000 in deductions than if you claim $2,000.

Not reporting all of your income is an easy-to-avoid red flag that can lead to an audit. Taking excessive business tax deductions and mixing business and personal expenses can lead to an audit. The IRS mostly audits tax returns of those earning more than $200,000 and corporations with more than $10 million in assets.

Further Details on FY 2022 Audit Rates

The IRS divides taxpayers into different examination classes. The IRS sees the typical taxpayer reporting an income of less than $200,000. These taxpayers faced an odds of audit of just 1.9 out of every 1,000 returns filed (0.19%).

The two groups most likely to get audited are those earning more than $10 million and taxpayers who claim the Earned Income Tax Credit, who tend to be low- or middle-income workers.

For now, though, the chances of a high income earner being audited by the IRS remain vanishingly low. A new report released by the Transactional Records Access Clearinghouse at Syracuse University found that a millionaire's chances of coming face-to-face with an auditor fell in 2022 to just 1.1%.

The tax agency said Thursday that it is starting to send letters to 25,000 people who earned more than $1 million a year but didn't pay taxes between 2017 and 2021. The IRS is targeting another 100,000 people who earned between $400,000 and $1 million and didn't file taxes during the same period.