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.