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Are high income taxpayers more likely to be audited by the IRS?

According to an IRS statement published in May, the IRS has recently doubled the audit rates for taxpayers in every income category above $100,000. Audits for taxpayers and their related entities making above $10 million have increased fourfold. The IRS is not reducing its audit rate for any income category. The IRS noted that audits of high-income taxpayers or those with complicated returns often commence one year after the filing of the return but can occur even later in the statutory period, which is generally three years from the date of filing.

The IRS statement comes after the scrutiny on the agency as a result of several reports reflecting the surprising decline of audits of high-income earners. The 2021 report from the Treasury Inspector General for Tax Administration found that IRS audits declined by 44% between 2015 and 2019. Taxpayers with $1 million or more in income saw a drop of about 75% in audits. In another 2021 report, the Government Accountability Office disclosed that a taxpayer reporting $5 million or more of income had just over a 2% likelihood of being audited in 2019 versus 16% in 2010. Said another way, in 2010 the likelihood of being audited was 1 in 6 if your income was $5 million or more versus 1 in 50 in 2019. It is noteworthy that per the GAO report, despite a decline in IRS audits of lower income taxpayers, the majority of additional taxes recommended by the IRS from 2010 through 2021 came from taxpayers with income below $200,000.

While the IRS now appears to be auditing taxpayers with higher income at a greater rate, it has historically audited low-income taxpayers claiming the Earned Income Tax Credit at a much higher rate. A report released by the Transactional Records Access Clearinghouse reports that out of the 660,000 audits conducted by the IRS in 2021, about 307,000 were of those taxpayers who claim the EITC, which is generally intended for those earning less than $25,000.

So, do high income taxpayers have to worry more about being audited by the IRS? While the odds are low, we can expect an increase in audits as the IRS executes on its plan to hire more agents. In the meantime, filing an accurate return is still important as the magnitude of errors or omissions can add up to significant interest and penalty assessments.

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