IRS Audits for the the Wealthy Increasing

For all taxpayers, the odds of getting audited on your 2010 taxes have increased by 8% from last year. And they’ve doubled since 2001, according to a CNN Money report. But for the highest income earners, watch out, cause an audit train could be headed right for you. Last year, tax audits jumped 73% for the top bracket, covering more than 18% of taxpayers in the highest marginal rate. The question: is the government starting to go after millionaires? And is this bad?

It is absolutely true that the nation has an inappropriately hostile attitude towards the producers in America. We’ve seen this in the vilification of the wealthy during the financial crisis, and the constant claim from the middle and lower classes that the “rich” should be paying more—even though the top 5% pay nearly 60% of the taxes, and the bottom 50% pay only 3% of the taxes (according to 2008 numbers).

But the problem here isn’t the government going after millionaires, that is a problematic symptom. The problem is our archaic and complex tax code. We shouldn’t have a system that requires this kind of oversight—because there is no way the IRS can really catch all the fraud. It is not efficient. And it does not distribute the tax burden appropriately.

Now, it is true that even if the system is bad, we must consider the importance of rule of law and recognize that for moment we are stuck with the system we were born into. In this system there has been rampant tax fraud that should be stopped and serious regulatory failure in trying to do so that must be rectified. A recent poll found that tax evasion is about even across the income tax brackets, though it is more concentrated among young men. So perhaps IRS audits should be spread evenly across the board as well, but there is something to be said for the argument that that if the IRS is going to focus on tax fraud, it is a better use of resources to focus on those paying more of the tax bill then the lower classes.

However, that is not the story. This is just temporary. The story isn’t that audits jumped 73%—to assume that is somehow a bad thing assumes that the low number it jumped from was good in the first place. Maybe it was, maybe it wasn’t. But it doesn’t matter. The story should be that we have a tax code so complex and loopholey that it is requiring one in five of the top income bracket to have a legal review of their filings.

Here are at least three signs that we need Congress to take up substantive tax code reform:

One: Last year the IRS collected an additional $57.6 billion by auditing tax returns for the the top earners. That is a lot of fraud and honest error. That should be a sign that we need a change, not a sign that we need more enforcement of the current system.

Second: This year, Bank of America will get a tax refund of $1 billion instead of paying any taxes. Plus, for the second year in a row GM will pay no taxes, even with significant earnings in 2009 and $14 billion in profit in 2010. Though corporate taxation is double taxation and shouldn’t exist (at least the high, uncompetitive American corproate rates) it is still the system that we have and the ability for large corporations to avoid paying taxes should also be a sign that we need a change. The answer isn’t to find a way to make these companies pay in the current system, but rather a need for wholesale change.

Finally: Warren Buffett is now an infamous, classic example of how the tax code is a pile of swiss cheese that those with resources can do a lot to dance though. He pointed out himself back in 2007 that he pays less in taxes than his secretary. But neither Republicans nor Democrats, the Bush or Obama administrations has yet had the cahones to get down in the weeds of taxes, federal revenue, and spending patterns to fix what everyone knows is broken. How many more signs are necessary?

Anthony Randazzo

Anthony Randazzo is a senior fellow at Reason Foundation, a nonprofit think tank advancing free minds and free markets.