IRS Rarely Audits the Poor

IRS Rarely Audits the Poor

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President Obama has famously defined the rich as those making in excess of $250,000 per year.  Well, now we find out from the Associated Press that the IRS rarely audits anyone who makes less than $200,000. In other words, the IRS targets the rich:

Want to keep IRS auditors away? Keep your earnings under $200,000 and they won’t bother you 99 percent of the time.

IRS enforcement numbers, released Tuesday, show that returns under that amount have a 1 percent chance of getting audited.

Returns showing income of $200,000 and above have a nearly 3 percent audit chance. The percentage jumps to more than 6 percent for returns showing earnings of $1 million or more.

You may recall a recent spate of articles expressing outrage that a woman named Rachel Porcaro, a single mother making $10 an hour, was audited by the IRS. Ms. Porcaro said that the only reason she was audited was because she was poor. The first to jump on the IRS-targets-poor-people soapbox was Danny Westneat of the Seattle Times:

Rachel Porcaro knows she’s hardly rich. When you’re a single mom making 10 bucks an hour, you don’t need government experts to tell you how broke you are. But that’s what happened. …   It all started a year ago, when Porcaro, a 32-year-old mom with two boys, was summoned to the Seattle office of the IRS. She had been flagged for an audit.

She couldn’t believe it. She made $18,992 the previous year cutting hair at Supercuts. A few hundred of that she spent to have her taxes prepared by H&R Block. “I asked the IRS lady straight upfront — ‘I don’t have anything, why are you auditing me?’ ” Porcaro recalled. “I said, ‘Why me, when I don’t own a home, a business, a car?’ “

The answer stunned both Porcaro and the private tax specialist her dad had gotten to help her. “They showed us a spreadsheet of incomes in the Seattle area,” says Dante Driver, an accountant at Seattle’s G.A. Michael and Co. “The auditor said, ‘You made eighteen thousand, and our data show a family of three needs at least thirty-six thousand to get by in Seattle.” “They thought she must have unreported income. That she was hiding something. Basically they were auditing her for not making enough money.”

Seriously? An estimated 60,000 people in Seattle live below the poverty line — meaning they make $11,000 or less for an individual or $22,000 for a family of four. Does the IRS red-flag them for scrutiny, simply because they’re poor?

Then there was Alice Gomstyn of ABC News:

Can you get audited for being too poor? That’s what one Seattle woman says happened to her.

“The tax compliance officer pulled out an Excel spreadsheet printout and said something to the effect of … (that) IRS data showed that it takes $36,000 to support a family of three in Seattle,” said tax manager Dante J. Driver, an accountant who worked with Porcaro to appeal the IRS’s claim. “It looked and smelled like she was getting audited for being too poor.”

The agency, Porcaro said, alleged that she failed to report sources of taxable income outside her hair dresser’s salary on her 2006 and 2007 tax returns.

What drove the IRS to that conclusion? The fact that, according to their statistics, Porcaro, who earned just under $19,000 in 2006, couldn’t possibly afford to raise her children on her salary alone.

And here’s fellow tax blogger Kelly Philliips Erb a/k/a Tax Girl:

Porcaro was selected for audit last year. When she asked why she was chosen, the IRS explained that she was too poor.

Yuh-huh. You read that correctly.

The IRS determined, through its handy-dandy database of “what it takes to get by” that her income was too low to support her family. Her income, $18,992, was about half of what the IRS thinks you need to manage a family of three in Seattle. Bells went off – the IRS assumed that she was hiding income (of course).

I find it hard to believe that the IRS examiner actually told Ms. Porcaro that the reason she was being audited was that she was “too poor.” As Kelly points out, it is more likely that she was told that the income reported on her tax return was insufficient to cover the standard living expenses typically incurred by similarly situated taxpayers.

Members of the media often find it difficult to pass up a story about how the system is screwing the little guy. They are, after all, human and it makes them feel good to champion the cause of the oppressed. But this sometimes causes them to take shortcuts and fail to investigate the facts as diligently as they should.

In the Porcaro case a little research would have revealed that it’s extremely rare for middle-class and poor people to be audited. A quick visit to the statistics section of the IRS website would have revealed that the opposite is true. The IRS typically targets returns for audit that show more than $200,000 of adjusted gross income.

In other words, the case of Rachel Porcaro is the exception and not the rule.

I am not in the habit of defending the IRS, but in Porcaro’s case I must. The only way the IRS can determine which taxpayers are most likely to have unreported income is to perform what is known as a financial status analysis. The IRS knows that if a taxpayer’s return shows that the taxpayer made, say, only $20,000 in a tax year and she has three children, there must be other sources of income. Of course, this doesn’t mean that the taxpayer failed to report all of her taxable income, but it does mean that there is a reasonable possibility that this is the case.

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About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida

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Comments

  1. Your statement that the IRS rarely audits the poor depends on your definition of “rare.”

    The National Taxpayer Advocate does not agree with your statement that such audits are rare.

    If you visit the IRS statistics on returns selected for audits, you will see that the IRS audits half a million EITC taxpayers a year, and Rachel Porcaro (single mother of two kids earning a bit over minimum wage working fulltime) is very typical of the type of EITC taxpayer they audit.

    (Theoretically, in 2007 a taxpayer could have claimed EITC with an income up to almost $40,000, but the amount of EITC would have been so small that it’s unlikely the IRS would have selected the return for audit.)

    Low income taxpayers claiming “qualifying children,” as Rachel Porcaro did are more likely to be audited than any other income group with the exception of taxpayers earning over $200,000 per year.

    The IRS audits those returns at a high rate because the rate of error and deliberate fraud (some of it perpetrated by unscrupulous paid preparers) on such returns is very high.

    Unfortunately, under our current system, this is a burden for many innocent taxpayers who have the bad luck to be selected for audit. Nina Olson has conducted studies showing that many low-income taxpayers do not even attempt to contest the IRS challenges to their returns.

    When they have representation, their odds of successful challenge are considerably higher, but, as a practical matter, the number of low income taxpayers that can be served by existing resources is a small fraction of those audited.

  2. Mary,

    The use of the word “rare” is relative. The point, of course, is that a taxpayer is much more likely to be audited if he is rich.

    But apparently it’s fun to pretend that the rich are getting handouts while the poor get screwed.

    Untrue, but fun.

    By the way, there is so much fraud and abuse with the Earned Income Tax Credit the IRS should be auditing more of these people.

    Refundable credits breed abuse.

  3. This article sounds like it was written by a rich stuck up person.

    There isn’t much difference between 1% vs 3%. I hardly call that much more likely.

    Its more like this article is the one trying to twist the truth around.

  4. I see now this article was written by a lawyer. And we all know how rich they are. That explains everything.

  5. TC,

    That’s a brilliant argument. I am entirely convinced and take back everything I said on the subject.

    ROFL.

  6. TC,

    LOL.

    3% is three times more likely than 1%.

    Now I see why you’re poor.

  7. I’ve been audited 3 times in 8 years,2010 the most recent.I am not alone.Last time audited I won the challenge.You peddle tripe in asserting people like me are not being audited more than the upper income bracket.Good luck convincing the real recipients of economic class warfare you speak with an iota of veracity.

  8. Steve,

    Wrong. I peddle facts that professional “victims” hate to hear.

    If you really believed what you say about lower income people being targeted by the IRS, you would go back to school so you could eventually join the ranks of the upper income earners who don’t get audited?

    Just a thought.