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Report suggests IRS take audit heat off $200-400K earners

Obviously, the IRS cannot audit every tax return it receives. In fact, less than 1 percent of individual returns end up being audited, according to Marketwatch.

With limited time and resources, in fiscal year 2014 the IRS focused on people in two income brackets: the wealthy and the superwealthy. Agents audited 1.5 percent of returns for people who earned between $200,000 and $400,000. For those with income of more than $5 million, the audit rate shot up to 12.1 percent.

Even that strategy may not bring in enough tax revenue. An inspector general’s report suggests that focusing so much on people in the $200,000-$400,000 range is a waste of time and resources. An auditor working on cases in that range recommends an average of $605 in additional taxes per hour. Auditors working on people’s returns in the $5 million range recommend $4,545 per hour, the report said.

The IRS appears to be receptive to the suggestion to take the heat off of six-figure income earners. It said that it would reconsider its definition of $200,000 as a “high income” for auditing purposes. If that definition changes, it could mean even more of a focus on ultra-high incomes starting soon.

This would be good news for people who earn less than $1 million per year. For those making $5 million or more, it would mean the chances of an audit will go up significantly. With about one in eight in the $5 million category already experiencing an audit during the last fiscal year, that is saying something.

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