IRS Audits Target Wealthier People and Companies

The Internal Revenue Service has increased its audit rates of the wealthiest individuals and corporations, according to testimony by IRS Commissioner Douglas Shulman.

Shulman (pictured) told a hearing of the House Appropriations Committee's Financial Services Subcommittee that, in fiscal year 2008, the IRS conducted nearly 1.4 million examinations of individual tax returns, an 8 percent increase over fiscal year 2006. The audit coverage rate also rose from 0.58 percent in fiscal year 2001 to 1.01 percent in fiscal year 2008.

“While the growth in examinations of individual returns is visible in all income categories, it is most apparent in examinations of individuals with incomes over $200,000,” said Shulman in his prepared testimony. “Audits of these individuals increased from 105,549 in FY 2007 to 130,751 during FY 2008, an increase of 24 percent. Their coverage rate has risen from 2.68 percent in FY 2007 to 2.94 percent in FY 2008.”

In the business arena, he added, audit coverage rates for small corporation returns (with assets under $10 million) increased slightly over fiscal year 2007 by 0.03 percent. However, coverage rates for three classes of large corporations with assets between $50 million and $250 million and higher all increased. Coverage rates for partnership returns stayed even as compared to fiscal 2007, while Subchapter S returns reflected a small 0.05 percent drop due largely to an increase in the number of S corporations. The coverage rate for tax-exempt organizations increased slightly.

Rep. Jose Serrano, D-N.Y., pointed out during the hearing that Shulman’s figures contradicted the findings of Syracuse University’s Transactional Records Access Clearinghouse, which showed that audit rates for wealthy individuals had declined steeply (see IRS Audit Rate for Millionaires Plummets). Shulman disputed those findings, saying, “We think some of it is wrong and some of it is looking at unfair comparisons,” according to Reuters. The IRS’s own Web site, however, shows that the agency audited about 5.6 percent of individuals making over $1 million in fiscal 2008, compared to 6.8 percent in 2007.

The IRS Criminal Investigation Division has also been vigorously attacking egregious tax avoidance, money laundering and other financial crimes, Shulman noted. The overall number of individuals charged in an information or indictment rose from 2,323 in fiscal 2007 to 2,547 in fiscal 2008. Over the same period of time, prosecution recommendations for employment tax evasion more than doubled. The incarceration rate in these investigations was 81 percent and the average sentence was 29 months.

In fiscal 2008, IRS-developed cases related to foreign and offshore issues also resulted in 61 criminal convictions, and the average term for those going to jail was 32 months. For the first four months of fiscal 2009, there were 20 convictions, and the average sentence was 84 months.