Audits of millionaires edge higher in fiscal ’06

A taxpayer who made more than $1 million had a 1-in-16 chance of being audited by the IRS in the fiscal year just ended, up slightly from the year before.

Commissioner Mark Everson said Monday that the Internal Revenue Service also paid more attention to the filings of small businesses that tend to underreport incomes and to the records of tax-exempt organizations.

Overall, enforcement revenue for fiscal 2006 ended Sept. 30 was $48.7 billion, up 3% from $47.3 billion. Revenue in fiscal 2005 had jumped 10% because of collections from a crackdown on improper tax shelters.

“We have restored the credibility of our enforcement programs, which were badly diminished and to some degree gutted” in the 1990s, Everson said.

The “tax gap,” the difference between what taxpayers owe and what is collected, has been estimated as $345 billion annually, and Democrats coming to power in Congress see closing this disparity as an important way to raise revenue without raising taxes.

Everson said that audits of individuals making $1 million or more increased to 17,015 from 12,835, up by one-third. That was an increase to 6.3% from 6.1% because of the growing number of millionaires. About 1% of all taxpayers face audits.

Audits of people with incomes surpassing $100,000 were up 18%, to 257,000. Total audits increased 6%, to almost 1.3 million.

Everson said there was also a one-third increase in audits of S corporations to almost 14,000. An S corporation is generally a small business in which profit “passes through” to the owners, who report it on their personal tax returns.

He said the IRS had added resources to its tracking of charitable and tax-exempt organizations, with audits up 43% to 7,000. Without verifying the integrity of these groups, “Americans will lose faith in charities,” he said.