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Biden Plan Includes Uptick in Tax Audits for the Wealthy

By Maurie Backman - Apr 30, 2021 at 8:48AM

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Attention, higher earners -- your taxes may be subject to further scrutiny in the future.

Filing taxes is a stressful-enough prospect without throwing audit fears into the mix. Thankfully, the IRS audit rate is generally low, coming in at under 1% of all returns filed.

Higher earners, however, are statistically more likely to get their returns audited than average earners. And if President Biden's new tax proposal goes through, the probability of getting audited will increase even more among the country's wealthiest.

Cracking down on high-earning taxpayers

The IRS estimates that as much as $1 trillion in taxes may go uncollected each year. The problem, however, is that the agency is extremely short-staffed and doesn't have the capacity to conduct as many tax audits as it would like to. In fact, the IRS has lost 17,000 auditors since 2010.

Man lifting paper out of envelope that says you are getting audited

Image source: Getty Images.

President Biden, however, wants to allocate additional funds to the IRS to increase audits among the wealthy. Audit rates on filers earning over $1 million a year dropped 80% between 2011 and 2018, whereas enforcing those audits among higher earners could raise $700 billion over the course of the next decade.

Should you be worried about an audit?

If you're an average earner, Biden's proposal won't necessarily increase your chances of getting your taxes audited. But for higher earners, the audit rate may tick upward.

Still, that doesn't mean the wealthy are doomed off the bat. If you're a higher earner and you want to avoid a tax audit, one of the best rules to follow is to simply not lie. Report all of your income, only claim tax credits and deductions you're actually entitled to, and limit yourself to legal tax breaks, such as maxing out an IRA or 401(k) plan to shield a chunk of your income from the IRS.

At the same time, it's important to keep meticulous records so that if your tax return is questioned by the IRS, you'll have proof to back up your claims. You may, for example, have a year when you claim a proportionately high number of business deductions. But if that deduction is legitimate, and you have the paperwork to back it up, that audit won't have to end badly.

Remember, too, that while President Biden is seeking to funnel more money to the IRS for audit purposes, that doesn't mean the agency will shift to a system where audits are automatically conducted in person. Right now, most audits are conducted by mail, and that won't necessarily change, even if the IRS gets additional funding.

Increasing audits isn't the only plan Biden has on the tax front. He's also seeking to implement a higher top marginal tax rate and double the capital gains tax rate. But to be clear, these changes would apply to the very wealthy only.

In fact, Biden has pledged to not raise taxes on anyone earning $400,000 or less. As such, if you fall into the moderately wealthy category, you may not be impacted at all by higher tax rates or an increase in audit rates if Biden's plan does indeed go through.

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