High-net-worth clients aren't getting audited as much
(Bloomberg) — The chances of an IRS audit for clients making at least $10 million a year plunged during the government’s last fiscal year, according to data released on Monday.
The audit rate for high earners fell to 6.66% for fiscal year 2018, less than half of the 14.52% rate the year before, according to the IRS data. The government’s fiscal year runs from Oct. 1 through Sept. 30.
The most recent data spans the nearly three months before the enactment of the 2017 tax law, which cut rates for individuals and businesses. It also spans the first nine months of 2018 in which the revamp first affected tax filers.
The Internal Revenue Service tries to balance what it calls a twin policy of “service” and “enforcement.” IRS Commissioner Charles Rettig said in the report that included the recent figures that “enforcement of the tax laws is critical to ensuring fairness in our tax system.”
For both fiscal years, audit rates for those earning more than $10 million in adjusted gross income — the wealthiest income group tracked in the data — were still the highest of any income groups.
But audit rates also plunged for those earning $5 million in AGI to under $10 million, to 4.2% from 7.9%. They also dropped for those earning $1 million to $5 million in AGI — to 2.2% from 3.5%. Audit rates dropped very slightly for income groups between $100,000 and $200,000, from 0.47% in 2017 to 0.44% in 2018.
The fresh data also showed a steep drop in the tax agency’s collection of gift taxes during its last fiscal year, to $1.2 billion from $1.9 billion. Last year’s tax law doubled the value of assets that can be transferred to heirs without triggering federal estate or gift taxes — to nearly $11.2 million for an individual and $22.4 million for a married couple.
The thresholds rise slightly in 2019 and potentially more in later years, before expiring at the end of 2025, when the exemptions revert back to half of their current levels. Amounts over exemption levels are taxed at 40%. The IRS said last November that it won’t seek to “claw back” taxes on gifts made before 2026.