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IRS Audit Rate Almost Doubles for Richest U.S. Taxpayers

March 14 (Bloomberg) -- The Internal Revenue Service audited 18.4 percent of taxpayers reporting income above $10 million last year, up from 10.6 percent the previous year.

Audit rates increased in 2010 for all income groups, except for people with no adjusted gross income, according to data released today in Washington for the fiscal year that ended Sept. 30.

Highest earners had the sharpest increases in audit rates. The IRS audited 11.6 percent of taxpayers reporting adjusted gross income between $5 million and $10 million, up from 7.5 percent the year before. Taxpayers making between $75,000 and $100,000 faced the least chance of an audit, with a 0.64 percent rate.

Through its voluntary offshore disclosure programs and court cases involving Swiss banks, the IRS has gotten a better understanding of how wealthy people in non-corporate businesses manage their assets, said George Clarke, an attorney at Miller & Chevalier Chartered in Washington.

“They learn things and then they roll those things out across the board,” he said.

The overall audit rate for income tax returns was 1.11 percent, up from 1 percent the year before. The IRS had previously reported some of this data without the breakdowns at the top of the income scale. For people reporting income of more than $1 million for calendar 2009, there were 388,763 returns and 32,494 audits, for a rate of 8.4 percent.

Concerted Effort

The increase in audits of people making more than $10 million is part of a concerted IRS effort to focus on the business dealings of the wealthiest individuals.

“Our goal is to better understand the entire economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise,” IRS commissioner Douglas Shulman said in October 2009 upon discussing the formation of a group within the agency focused on “global high-wealth” individuals.

“We cannot do this by continuing to approach each tax return in the enterprise as a single and separate entity,” he said. “We must understand and analyze the entire picture.”

Higher audit rates are designed in part to build public confidence in the tax system and encourage voluntary compliance by making taxpayers at all income levels think they may be audited, Clarke said.

‘Fair Share’

“The government has an obligation and a duty to make people believe that everybody is paying their fair share,” he said. “And particularly with respect to the wealthy, there’s a view that they’re able to get out of their obligations.”

The data released today also show that tax collections haven’t yet rebounded to their pre-recession levels. IRS gross collections in fiscal 2010 were $2.35 trillion, down 0.01 percent from the previous year. Gross collections peaked at $2.75 trillion in 2008, and the 2010 total is the lowest since 2005.

Because of flat collections and an increasing budget, the IRS’s cost of collecting $100 increased to 53 cents, up from 50 cents in 2009. That’s the highest level since 1995.

The IRS initiated 4,706 criminal investigations in 2010, up 14.2 percent from 2009. Referrals for prosecution also increased to 3,034 from 2,570, or 18.1 percent. The IRS audited 1,581,394 individual income tax returns in fiscal 2010.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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