Every year, tax dodgers and cheats cost the U.S. Treasury more than $381 billion, according to one estimate.
So it is perversely off-task that the IRS – decimated by a decade’s worth of budget cuts – conducts fewer audits every year of the wealthiest taxpayers with the most complicated incomes, while auditing the working poor with zeal.
The IRS says: It’s just easier to audit the poor.
It sounds absurd, but that has been the message IRS Commissioner Charles Rettig has given in response to inquiries from Oregon Sen. Ron Wyden, who has been pressing the tax-collection agency to explain itself and calling for increased funding so it can better do its job.
Wyden, the ranking Democrat on the Senate Finance Committee, has been a steady critic of these audit patterns, which do little to catch big tax cheats and deny many working Americans a tax credit they deserve.
“While the wealthy now have an open invitation to cheat, low-income taxpayers are receiving heightened scrutiny because they can be audited far more easily. All it takes is a letter instead of a team of investigators and lawyers,” Wyden, the ranking member of the Senate Finance Committee, told ProPublica last year.
A spotlight was shone onto the issues of tax fairness and audits last week – aka, a million years ago – with the New York Times’ publication of an investigation of President Donald Trump’s tax filings. The report revealed that the president had not paid any federal income taxes for 11 of 18 years, and had paid just $750 in the first two years of his presidency.
On average, a taxpayer earning less than $25,000 in Spokane County would have paid $858 in 2017.
It’s not clear whether the accounting loop-de-loops that might produce such an eye-wateringly low figure were legal; it was, many experts noted, implausible but not impossible that they were, given the loophole-riddled nature of the tax system.
That is where the individual story of the president’s taxes crashes into the larger, longer-term reality of our government’s damaged ability to catch tax cheats.
Trump, it was revealed, has been the subject of an ongoing audit battle with the IRS since 2011 – the kind of long, involved and contentious audit that the IRS conducts less and less.
Over the past decade, the agency has steadily been starved of the resources needed to audit taxpayers with high incomes and complicated financial lives – the result of budget-cutting put forth, chiefly, by Republicans with a range of political concerns about the agency that have resulted in greater and greater freedom for tax cheats.
Between 2010 and 2019, the number of tax returns filed has increased by 10%, according to the agency’s annual data book. In the same period, the number of revenue agents on staff to conduct audits has plunged from 13,879 to 8,526 – a decrease of 39%.
The last time the agency had fewer than 10,000 agents was in the 1950s, according to ProPublica.
The result has been a steady reduction in the number of audits conducted on wealthy Americans – coupled with an insistent focus on auditing working families who receive the earned income tax credit.
Those who receive the EITC – many of whom have incomes below $20,000 – are audited at the same rate as the wealthiest 1%.
In raw numbers, this means the IRS audits about 173 times more returns filed by the working poor than the wealthiest taxpayers – 330,461 EITC audits were closed in 2018, compared to 1,903 of the filers with a “total positive income” of $10 million or more, according to Rettig’s letter to Wyden last October.
One reason for this disparity, according to the investigative work of ProPublica, has been political pressure to focus on the looming threat of poor welfare cheats over wealthy tax cheats.
Rettig’s explanation for this is that it’s hard to audit the rich.
It’s much easier to go after the poor. It takes an experienced revenue agent with accounting expertise to audit the rich; an inexperienced tax examiner with no accounting background can handle an EITC audit.
An EITC audit can be handled via correspondence and takes an average of five hours, Rettig said. Auditing a rich person might take as much as 250 hours.
It’s just so dang hard.
Focusing all that auditing on the poor does more than give the rich a free pass. It results in unintended denials of EITC benefits for the people who need them. The tax-credit program is the country’s largest anti-poverty effort, dispensing credits worth $64 billion to more than 26 million people. It can be worth $6,000 for a family with three children.
A National Bureau of Economic Research working paper in 2019 cited IRS data to show that most EITC audits were focused on rural, poor areas with largely African American populations in the South.
Eighty percent of these audits closed with an eligible taxpayer being denied benefits because a return was incomplete, no response to the audit was received, or for other procedural reasons, the researchers said.
Only 15% of those audited were actually ineligible for the tax credit.
Meanwhile, billions in unpaid taxes go uncollected – and un-looked-for.
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