"Where the Money Is" or "Selective Enforcement"--the IRS Occupies the 0.1% with Audits

IRS Audits Hyper-High Earners

The Internal Revenue Service has significantly increased the rate of audits on very high income taxpayers with the audit rate on taxpayers with incomes over $10 million going from 18% to almost 30%, the audit rate on incomes of $5-10 million increasing from 12% to slightly over 20% and the rate on $1-5 million incomes going from 7% to 12% (the overall audit rate barely exceeds 1%). Commissioner Doug Shulman warned that additional budget "cuts" would limit the ability of the IRS to perform audits and may cause the "tax gap" to increase. Additional statistics reported: The IRS collected $2.4 trillion in taxes; five out of six individual returns showed refunds; over 230 million returns were processed and over 400 million taxpayers received assitance in person or on the phone during the past fiscal year (Oct '10 to Sept '11).

This data leaves me with mixed emotions. On the one hand, so long as horizontal equity is maintained on tax audits (e.g. Warren Buffett and Rush Limbaugh effectively have the same likelihood of being audited) there IS a statistical case to be made for auditing high-income returns at a high rate for both revenue collection and adminstrative reasons--an audit of an errant or overly aggressive return of a taxpayer with $6 million in AGI likely will produce a similar (and possibly higher given progressive tax rates) level of revenue to auditing 100 similarly-flawed returns of taxpayers with AGI of $60,000 at a sizably reduced administrative cost. On the other hand, a nearly 3000% difference in the audit rate of taxpayers over $10,000,000 vs. average taxpayers feels like the class envy so clearly brought to the forefront with last summer's Occupy Wall Street (and other places) movement. Is it just me or do parts of the American public believe that you can kill geese laying golden eggs and still have golden omelets a week later?