The IRS Had A Record Year For Individual Tax Enforcement, Corporate Enforcement Not So Hot

If you were thinking about cheating on your taxes this year I would suggest that you read the latest report from the IRS. The catchy title says it all: (PDF Link)


It seems that the good folks at the IRS are burning the mid-night oil. Their results are up across the board, with only one exception. Audited returns for companies with assets greater than $250 million fell by nearly 50% between 2005-2010 (2010:23.44%, 2005:44.1%). This, no doubt, reflects the fact that our large corporations are so honest these days.

Some bits from the report. Note that there are two ways of looking at this. The results are presented in both per cent and raw data. The per cent numbers may lead you to conclude that you might not get caught if you fudge some numbers. But the raw data will scare you in a different direction.

-Only 1% of taxpayers with incomes under $200,000 are audited. So you have a 1 in 99 chance of getting hit. However, in 2010 1,428,000 people got “the letter“. There are only six cities in America that have a population greater than 1.4mm.

-If you make more than 200k, but less than a mil you have more to worry about. 153,000 (3%) in this group got nailed.

-If you are lucky enough to make more than a mil you have the IRS looking over your shoulder. The odds are 1 in 12 for an audit. 32,500 rich folks got porked in 2010.

-Speaking of high incomes these graphs blow me away. We hear again and again about how terrible it was during the deep recession of 2007-2009. Nonsense. The number of people filing big-ticket returns never dipped. It steadily rose.

chart tax filings over 200K

Photo: IRS via Bruce Krasting

chart tax filings over million

Photo: IRS via Bruce Krasting

-If I was wearing an IRS hat the first place I would look is at partnerships. The opportunities for abuses jump out at you in these set ups. The IRS would not hire me. They think quite differently of partnerships in general. Of the 3.4mm partnership and 4.4mm Sub-S returns (7.8mm total) only 28,700 were looked at. A scant 0.37%. Go figure.

-There are 22,700 IRS agents looking for trouble. They find it. In 2010 they filed 1.64mm cases and as a result collected an extra $57 billion (100% 10 year increase). That aint hay. It comes to more than $2.5mm per agent. These nice people are not bounty hunters working commission. They are civil servants. But don’t for a second believe that there is no connection to what they collect, and what is their pay grade.

-If you did slip up, you get a letter that goes like this:

Dear Taxpayer, We have audited your return……..
It ends with:

……..So please stop by next Tuesday at 2. Bring your papers and a lawyer might be nice. Don’t be late, we will just lean on you harder.

Should you get the black letter; just bend over. The IRS wins 90+% of the cases it pursues.

-The final thing to consider when contemplating stiffing Uncle Sam is, “What’s the downside?” In 2001 the average tax cheat spent 18 months in the slammer. If you get banged in 2011 you’re looking at 27 months.

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