IRS Audits Of Super Rich Still Few And Far Between, Report Finds (UPDATE)

Super Rich Still Have Little To Fear From IRS

WASHINGTON -- Despite the Internal Revenue Service's promise to bring new scrutiny to tax avoidance schemes used by the super rich, a new report finds that of the nearly 8,300 individuals recently reporting adjusted annual gross income of $10 million or more, as few as a dozen may have actually been audited by the special unit devoted to the task.

The report from the Transactional Records Access Clearinghouse (TRAC), a Syracuse University organization that monitors government performance, found that the IRS's Global High Wealth unit, announced to much fanfare in late 2009, completed audits of only 36 super-high-income returns in its first two and a half years. Because returns from more than one year may be considered, it's possible that as few as 12 individuals were audited.

The relatively few number of audits nevertheless generated a fairly substantial amount of cash for the government: $47,729,198, or over $1.3 million per audited return.

And the pace appears to be picking up, with fully as many audits having been conducted in the first five months of fiscal year 2012 as in the entire fiscal year 2011. The pace of field audits of taxpayers reporting more than $1 million in income per year has similarly increased.

IRS spokesman Terry Lemons said the TRAC report’s focus on closed audits creates a false impression. "A better measure is how many audits we have open," he said.

The new unit currently has more than 100 taxpayers under audit and is beginning steps to audit 200 more.

"We are still in the relatively early stages of this unit," Lemons said. "In the last nine months, we've had nearly half of the employees brought on board." Some of the returns are "incredibly complex," he added.

Lemons noted that the new unit "is just a small segment of what's going on here at the IRS" -- and that overall, 12 percent of taxpayers reporting more than $1 million in income are audited either by mail or in person.

TRAC co-director David Burnham said the IRS deserves credit for at having taken on the challenge, long before groups like Occupy Wall Street helped focus national attention on the super rich. But he said the agency just hasn't delivered.

One reason could be that the super rich have the system so fixed in their favor that the IRS is simply stymied, he said.

"Maybe this is great evidence that the tax code is so complicated, the IRS can't unravel the tax returns of these very wealthy individuals. Maybe they can't do it," Burnham said. "It's a great argument for trying to simplify the tax system."

While average Americans feel fortunate if they can use TurboTax to identify a few tax breaks, there's a multibillion-dollar industry devoted to helping the very rich keep their money away from Uncle Sam. Northwestern University political economist Jeffrey Winters has coined a term to describe the army of lawyers, accountants, wealth management consultants, insurance providers, revolving-door lobbyists and think-tank debate framers who create, wield and defend tax avoidance strategies: He calls them the "income defense industry."

In December 2009, IRS Commissioner Douglas Shulman noted that "many high-wealth individuals make use of sophisticated financial, business, and investment arrangements with complicated legal structures and tax consequences. Many of these arrangements are entirely above board. Others mask aggressive tax strategies." He vowed that the new unit would "look at the entire web of business entities controlled by a high-wealth individual."

Burnham said Shulman overpromised. "You can be understanding that it's a hell of a challenge," Burnham said. "But it's dangerous to make that kind of speech and then not deliver on it. It encourages taxpayers to say the system's not on the level."

The TRAC report quotes from this year's IRS ombudsman report to Congress, which warned that "compliant taxpayers who see that the IRS is not able to pursue noncompliant taxpayers adequately begin to feel like 'tax chumps,' potentially making them less likely to comply in the future."

This story has been updated to reflect comment from the IRS.

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