Watchdog: IRS should spend less time auditing rich, more time on super-rich

WASHINGTON — The Internal Revenue Service is re-evaluating its strategy for auditing high-income taxpayers after an inspector general's report found that it spent more resources on taxpayers making a little more than $200,000 than taxpayers making more than $5 million.

Every hour spent auditing a taxpayer with more than $5 million in income nets the government $4,545, the Treasury Inspector General for Tax Administration found in a report released Friday. Auditing taxpayers in the  $200,000 to $399,999 income bracket was less fruitful, generating just $605 in revenue per audit-hour.

And yet the IRS spent more than four times as many hours examining taxpayers in the $200,000 to $399,999 income bracket than the $5 million-plus.

"it is not clear that the IRS audits the most productive high-income taxpayer cases or that it has a clear rationale for the inventory balance it has established among taxpayers at different (income) levels," said the report by Michael McKenney, the Deputy Inspector General for Audit.

That's especially important as congressional budget cuts have forced the IRS to pare back its taxpayer audits. The percentage of individual taxpayers audited each year has reached the lowest point in a decade, and is now just 0.84%.

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IRS audit rates at more than decade-long low

The highest-income taxpayers have seen the biggest decline in audit rates. In 2011, 30% of tax returns from taxpayers making more than $10 million got a second look by the IRS. In 2014, it was just 16%.

The IRS already gives special attention to tax returns with an income above $200,000. But the inspector general recommends that the IRS increase that threshold.

The agency will consider changing those thresholds, said Douglas O'Donnell, the commissioner of the IRS's Large Business and International Division, in a written response to the inspector general's findings.

But he also said the IRS does not target groups of taxpayers based just on how much revenue an audit will generate. "Our decisions on resource allocation cannot be made solely on the basis of productivity measures," he said. "The keystone of our compliance activities is to promote voluntary compliance, by identifying and working issues that have an impact on changing taxpayer behavior, and also providing a deterrent to other potentially non-compliant taxpayers."