Millionaires' audit chances fell 36% last year

— -- IRS audits of taxpayers with income of $1 million or more declined by more than a third last year, despite the agency's claims that it stepped up scrutiny of wealthy taxpayers, a new study says.

Audits of wealthy taxpayers dropped at least 36% in fiscal 2008 from 2007, according to a report released today by the Transactional Records Access Clearinghouse. TRAC is a research group affiliated with Syracuse University.

The drop in audits affected returns filed by taxpayers who earned income at the height of the real estate boom, before the economy turned sour, the report said.

In December, the IRS acknowledged that audits of wealthy taxpayers fell in 2008 but said the decline was much lower. In fiscal 2008, the IRS said, wealthy taxpayers had a 5.6% chance of being audited, down from 6.8% a year earlier. The IRS attributed the 19% decline to a drop in enforcement staff from the year before. Also, the IRS said, it had to divert staff to handle billions of dollars in stimulus checks.

TRAC said recently published IRS data suggest that wealthy taxpayers had just a 4.4% chance of being audited in fiscal 2008.

"In the face of growing federal deficits and public calls to lower the tax gap — the amount of taxes due but not reported and paid — the drop in millionaire audits is surprising," the report said.

The IRS disagrees with TRAC's analysis and stands by its earlier report, IRS spokesman Terry Lemons said.

Several studies have shown that wealthy taxpayers are more likely to hide income from the IRS. Taxpayers with adjusted gross incomes of $500,000 to $1 million fail to report 21% of their income on average, vs. 7% for those earning $40,000 to $50,000, according to a 2008 analysis by Joel Slemrod, a University of Michigan economics professor, and IRS economist Andrew Johns.

The TRAC report also found that face-to-face audits of wealthy taxpayers have plummeted even more than overall audits. Only 3.1% of wealthy taxpayers were subjected to a face-to-face audit in 2008, the same level as five years ago, the report found. The remaining wealthy taxpayers were subjected to less-intensive correspondence audits, which are conducted by mail.