High-Income Tax Returns

The latest available data regarding high-income tax returns was released recently by the IRS. 2011 is the most recent year for which data is available. Since 1977, the IRS has used the number $200,000 to define a “high-income” return. They have a formula by which that income is determined. It should be noted that this $200,000 amount has not been adjusted for inflation over the years. Had it been inflation adjusted, a “high-income” return would likely be defined as a return with income of $790,647.

In any event, for 2011, the number of high-income returns increased by 9.4% to almost 4.8 million returns. Of these returns, 15,000 had no income tax liability. That is a 6.7% decline in the number of returns with no income tax liability, and the second decrease in a row from the all-time high of 19,551 in 2009. Tax-exempt interest was the primary reason for nontaxability on more than half of those returns.

If the inflation-adjusted amount of $790,647 had been used, 440,000 returns would have been defined as “high-income.” We hear much about the top 1%. The top 1% of tax returns had an adjusted gross income of $388.905 or more and accounted for 18.7% of the total adjusted gross income for all returns in 2011. This group paid 35.1% of all of the income tax reported.

Other than my pure interest in these statistics, what is important here? The IRS audited a total of 1.11% of all returns in 2011. This might lead you to believe that your chances of audit are extremely low. That is generally true. But higher-income taxpayers have a higher chance of being audited. For example, if your income fell between $200,000 and $499,999 in 2011, your chance of being audited was just under

2%. If your income was between $500,000 and $999,999, your chances increased to about 3%. Jumping ahead, for those who had adjusted gross income in excess of $10 million, chances of audit jumped to just under 10%. IRS audits can be some nasty business. Most audits are by correspondence – through the mail or over the phone. Some, however, require a much greater level of involvement. If you lose the audit lottery, be prepared, organize your records, watch what you say, never lie and get the help you need. Do not discount the experience and knowledge that a tax professional can bring to the table when you are dealing with the IRS or a state agency. If there is a particularly difficult issue with your return or any tax matter, an attorney can help you with strategy and invoke the attorney-client privilege where needed.