Bauman CPA - Tax Alerts - July 2009 - Few high-income taxpayers escape U.S. taxation, IRS reports

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Few high-income taxpayers escape U.S. taxation, IRS reports

Less than one percent of high-income taxpayers claim no federal income tax liability, the IRS recently reported. The IRS received more than four million returns from high-income individuals in 2006 (the most recent year for which statistics are available) and approximately 8,000 reported no income tax liability.

High income

The IRS defines "high-income" as taxpayers with $200,000 or more in gross income. The number of returns filed by high-income taxpayers, those with $200,000 or more in gross income, increased by 500,000 in 2006. That figure represented approximately 2.9 percent of all returns filed for the year, approximately 4.06 million returns. The increase continues a trend since 2002, according to the IRS. However, the recession is likely to decrease that number when the IRS analyzes 2008 and 2009 returns.

Tax liability

Out of the high-income returns, 8,252 returns (0.203 percent) had no U.S. income tax liability and 4,123 (0.101 percent) had no worldwide income tax liability. This was a minor drop from 2005. Rather than one single reason, the IRS noted that high-income tax returns are often non-taxable due to a combination of factors.

Deductions

Higher income taxpayers claimed a variety of deductions, the IRS reported. They included:

35.8 percent claimed miscellaneous deductions;
14.6 percent claimed a deduction for net casualty or theft loss;
10.2 percent claimed the medical and dental expense deduction;
16.1 percent claimed the investment interest expense deduction;
8.3 percent claimed the foreign-earned income exclusion; and
4.6 percent claimed the charitable contributions deduction.

Enforcement

The IRS’s findings come at the same time that the agency is stepping-up its enforcement activities for high-income taxpayers. The IRS has launched a temporary compliance initiative to encourage high-income individuals to disclose unreported assets in foreign bank accounts. IRS Commissioner Douglas Shulman has told Congress that he intends to hire more revenue agents and personnel to audit high-income taxpayers.

(IRS Statistics of Income Bulletin (Spring 2009)