Big earners more likely to face audits


Congratulations, you’ve earned a million dollars. Now get ready for an audit.

The Internal Revenue Service is increasingly eyeing people who make more than $1 million a year. The agency audited 12.5% of such taxpayers in fiscal 2011, up from 8% in 2010 and 6% in 2009.

By comparison, IRS has mostly ignored filers reporting income of less than $200,000. In the last five years, IRS has audited only 1% of those income earners annually.

“It makes sense to look at the big, more complex returns,” said Dean Baker, co-director of the Center for Economic and Policy Research. “The auditing goes with the turf — that’s where the money is. Besides, these people are probably still happy they’re millionaires.”


But it may get more costly to be in the million-dollar bracket. President Obama has proposed forcing those making more than $200,000 a year subject to at least the same tax rate as those who make less. The proposed surtax has been dubbed the “millionaire’s tax” or the “Buffett Rule” after billionaire investor Warren Buffett and has drawn vigorous debate since it was introduced in the fall.

People who earn more than a million dollars annually currently pay, on average, about 29% of their income in taxes, amounting to $920,000 a year for those making $3.2 million, according to Andrew Fieldhouse, a federal budget policy analyst with the Economic Policy Institute. The tax rates can vary from 15% for hedge fund managers exploiting tax loopholes to 35% for pro athletes, Fieldhouse said.

At the same time, the recession and its aftermath stoked a fiery populist resentment that prompted some well-heeled Americans to shelve ostentatious purchases. But experts said anti-fat-cat activists are likely to have little long-term effect on big earners’ standard of living or wealth accumulation methods.

“It may strike a chord with a large swath of the population and may even have some political clout,” said economics professor Steven Fazzari of Washington University. “But it’s not really going to change millionaires’ lives. I wouldn’t discount the movement, but it’s not really a huge threat either.”

The Occupy movement is not expected to keep the millionaire’s club from becoming less exclusive — the bracket is expected to double in the U.S. by 2020 to 20.5 million people, according to the Deloitte Center for Financial Services. The combined worth of the group could soar to $87 trillion from $39 trillion this year.

Millionaires, or those with more than $1 million in investable assets, still make up a puny percentage of all households — less than 1% worldwide — but they control 39% of the wealth, the Boston Consulting Group said in May.


With 5.2 million millionaires, the U.S. has by far the most, followed by Japan, China, Britain and Germany, according to the group. There are also more ultra-well-off in the U.S. than in any other country, with nearly 2,700 households with more than $100 million in assets.

But the view from their manicured lawns is changing for the growing cadre of rich people.

The globalization of wealth is creating new and fragmented millionaire demographics, according to October research from research group TNS. Asian millionaires are sprouting at rapid rates, overtaking moneyed Europeans.

In China and Hong Kong, where sales of Mercedes-Benz luxury vehicles soared 112% in 2010 while Ferrari sales jumped nearly 50% the year before. Those consumers led a $91.2-million growth in auction sales of fine and rare watches, according to Christie’s International. The Chinese are also becoming aggressive bidders for high-end art.

The wealthy in Australia, Singapore and Hong Kong tend to be younger — in their early 40s. In North American, high rollers are 57 years old on average; 45% of them are men. Only 2 in 10 of Indian millionaires are women.

How millionaires handle their money is also shifting: With stricter regulations in Europe and North America, they’re putting a smaller percentage of their huge holdings in offshore accounts, according to the Boston Consulting Group.

In North America, high net-worth individuals put a greater portion of their holdings in equities at the end of 2010, reflecting growing confidence in the gradually improving economy, according to a report last year from consulting firm Capgemini and Merrill Lynch Global Wealth Management.