If You Don’t Want to Pay Some More (Haha, Mr. Heath)
Exterior of the Internal Revenue Service office in midtown New York.
1 July 2010 by Matthew G. Bisanz via Wikimedia Commons
Who needs malice from the IRS when some good, old fashioned bureaucratic indolence can do the job just as ruthlessly.
The IRS audits the working poor at about the same rate as the wealthiest 1%. Now, in response to questions from a U.S. senator, the IRS has acknowledged that’s true but professes it can’t change anything unless it is given more money.
ProPublica reported the disproportionate audit focus on lower-income families in April. Lawmakers confronted IRS Commissioner Charles Rettig about the emphasis, citing our stories, and Sen. Ron Wyden, D-Ore., asked Rettig for a plan to fix the imbalance. Rettig readily agreed.
Last month, Rettig replied with a report, but it said the IRS has no plan and won’t have one until Congress agrees to restore the funding it slashed from the agency over the past nine years — something lawmakers have shown little inclination to do.
On the one hand, the IRS said, auditing poor taxpayers is a lot easier: The agency uses relatively low-level employees to audit returns for low-income taxpayers who claim the earned income tax credit. The audits — of which there were about 380,000 last year, accounting for 39% of the total the IRS conducted — are done by mail and don’t take too much staff time, either. They are “the most efficient use of available IRS examination resources,” Rettig’s report says.
On the other hand, auditing the rich is hard. It takes senior auditors hours upon hours to complete an exam. What’s more, the letter says, “the rate of attrition is significantly higher among these more experienced examiners.” As a result, the budget cuts have hit this part of the IRS particularly hard.
For now, the IRS says, while it agrees auditing more wealthy taxpayers would be a good idea, without adequate funding there’s nothing it can do. “Congress must fund and the IRS must hire and train appropriate numbers of [auditors] to have appropriately balanced coverage across all income levels,” the report said.
There is a fine debate to be had here about legislative priorities, but frankly the funding issues of the IRS are not much different than DOD, DOE, or anything else in government. If you wrote the IRS a one billion dollar check today, only a fraction of that money would find its way into the hands of the auditors, investigators, and others who actually work on such cases. The same sleight of hand of “money for the troops!!!” that never gets past mid-level Pentagon offices, or education funds that never get anywhere near an actual classroom. The magic of governmental budgeting where the goal is not only to do more with less, but make it look like you need ever more on paper for the next fiscal year.
Just one more thing that needs audited, but probably won’t be; that wouldn’t advance careers and pad the stats such decisions are based off of that way. And no one is going to audit the auditors. Thus, one of the most absolute and god-like entities of our government with fearsome powers lurches ever forward. God Bless America, but God help its citizens who need and cannot afford, so an attorney appointed for them it is when it comes to dealing with the tax man looking for some low hanging citizen fruit.
Of course, if our tax code was not a tangled complicated mess, you wouldn’t need a host of senior auditors to unf*ck a wealthy tax return.Report
THIS. The reason they audit the poor is because (a) they can’t hire armies of lawyers and accountants to fight over it; (b) their taxes are pretty straight-forward. Simplify the system and you increase compliance and make it easier to catch the wealthy scallawags.Report
Honestly, this is a problem with our current political system, in that most of congress is wealthy themselves, and thus self interested in a complicated system, or beholden to wealthy interests in order to fund campaigns.Report
Our tax code is a tangled, incomprehensible mess because both parties try to impose their moral code on the citizens through it.
Strip it back to a flat tax, based on what the projected needs of the nation are. Stop trying to impose your morals through accounting.Report
THIS. Simple flat tax with a constitutional maximum (25%?) and a large personal deduction. Thus the poor would pay virtually nothing and the wealthy would approach a quarter of earnings.Report
And reward their donors. Also, at least in the most recent overhaul, bribe members of congress to vote for it.Report
I’m not sure this is true. Some of the complication in the tax code is political, but calculating investment income can be legitimately difficult for investments more complicated than “bought 10,000 shares at $15.38, sold 5,000 at $18.45.” For example, distinguishing between a valid business expense and a pretext for deducting personal consumption expenditures can be tricky.Report
And do you have to take 100% of the expense in the year you incurred it, or can you depreciate it? And if you depreciate something instead of taking 100% of the expense, should you pay taxes on the non-depreciated value? And should you pay property taxes on inventory, and if so do non-finished goods or raw materials count as inventory, and does it matter whether it’s available for sale or not, and and and and AND.
And these aren’t dodges, they aren’t cheats or loopholes, we want business owners to spend money buying things instead of keeping it in the bank because It’ll Just Be Taxed.Report
I’ve lost count of how many times I’ve seen reporters describing deductions for legitimate expenses like depreciation and employee compensation (!) as tax loopholes. Intellectually, I know that most reporters are pretty clueless when it comes to understanding the topics they’re reporting on, but I repeatedly find myself being blown away by how staggeringly incompetent the press corps is.Report
The tax code is a mess, but its complications have nothing to do with the returns of the vast majority of taxpayers, or the rate, or rates, at which income is taxed. Most of us get most of our income from salaries, from which a chunk of our income is withheld for taxes. Many of the rest of us get paid less regularly and nobody is withholding or we lie about cash tips, etc. Assuming we tell the truth, our returns are generally uncomplicated and whatever our tax rate is, determining what we owe is simple arithmetic. There may be good policy or ideological reasons for lowering or flattening the tax rates, but simplifying the returns of the vast majority of taxpayers isn’t one of them.
Most taxpayers don’t itemize and many who do shouldn’t bother.
Most of the complication involves the characterization of business income as regular income or capital gains, business expense deductions, and a cornucopia of special-interest rules that most taxpayers couldn’t use if they understood them. All of those special-interest rules have their advocates and beneficiaries. There are excellent arguments for getting rid of most of them, but simplification for the benefit of the average taxpayer isn’t among them.Report
This. My taxes are easy once I get all the different types of net income sorted out.Report
I don’t think anyone is bitching about business returns here. As far as personal returns go, just treat all income the same and a large problem magically disappears. Why should the IRS care about the source?Report
This.
We keep trying to solve moral problems with accounting solutions.Report
The IRS isn’t who cares. It doesn’t write the tax code; it merely enforces it. Congress wrote it.
Treating all income the same would greatly simplify things. No more structuring things to make things that might otherwise be treated as ordinary income (the only kind most working stiffs have) into capital gains to get a lower rate. When someone inherits an asset worth $1,000,000, treat it like an ordinary gain of $1,000,000 in income and tax the heir as someone who just won a lottery, instead of taxing the heir only on the unrealized appreciation during the lifetime of the original owner.
Maybe this sounds good to you. It sounds good to me. But people who make their money by buying things that appreciate or throw off income or by getting born into wealth disagree with us and press Congress to treat these types of income differently. All for good reasons, of course.Report
Just saving a few keystrokes there, good sir.Report
This gets back to something us libertarianish folks harp upon, that laws always have been, and always will, be enforced against those least able to fight back against the system, as long as we have structured the incentives to do that.
If you don’t think enforcement should target the poor (any enforcement, not just the IRS), don’t give them an incentive to do so, or give them a greater incentive to chase bigger fish.
Going back to the IRS, what is their incentive? What is the metric they are judged by? Is it the number of audits conducted every year? Is it the total amount of tax money recovered? Is it tax per audit?Report
I’ll bet it’s a budget thing. They get $X/yr. to perform audits. If the money doesn’t get spent, no allocation next year.
Really, auditing those who are reporting W-2, or gov’t. benefit income is just ridiculous. Uncle Sam already has all the info.Report
“[P]eople who make their money by buying things that appreciate or throw off income or by getting born into wealth disagree with us…”
CLASS
WAR
CLASS
WAR
“When someone inherits an asset worth $1,000,000, treat it like an ordinary gain of $1,000,000 in income and tax the heir as someone who just won a lottery”
It’s interesting seeing you opine on inheritance taxes when you don’t understand the difference between a suitcase with a million dollars and a million-dollar Estimated Price on realtor-dot-com.Report
Eh, it’s better than Critical Race Theory and has the benefit of being adjacent to the problem.Report
Have you ever heard of the concept of “basis”? Here’s how it works. Smith buys an asset, say, stock in ABC Corp. or a house, for $100,000. Over the next 20 years, its value increases to $1,000,000. Smith doesn’t pay any income taxes during the 20 years of appreciation because he hasn’t “realized” it by selling the asset. Then Smith sells it, realizing his gain, for $1,000,000. He pays taxes, at the favorable capital gains rate (whether that, in itself, is a good idea is an argument for another day), on $900,000 — the $1,000,000 realized minus the $100,00 he spent to acquire it, his basis. (Maybe if the asset is a house rather than ABC stock, he has some maintenance and improvement expenses that might be added into his basis, but let’s not complicate this more than necessary.) So the appreciation gets taxed as income to Smith.
But suppose Smith dies before realizing the capital gain, and Smith, Jr. inherits the appreciated asset. Smith, Jr. paid nothing for it and his wealth has been increased by $1,000,000. Accessions to wealth are, generally, income. How do we handle this? Here are the possibilities: (1) treat the estate of Smith as the taxpayer and levy an inheritance tax on the entire estate, currently at a rate well below the rate applicable to ordinary income (another issue for another time), then let the appreciated asset pass to Smith, Jr. if there is enough money in the estate to pay the tax without selling the appreciated asset; (2) treat Smith, Jr. as the taxpayer and treat the asset as ordinary income to Smith, Jr. — at least once he sells it and realizes the gain. Let’s assume that Smith, Jr. sells the appreciated asset five years later at $1,200,000 But at what basis? Smith, Jr. paid nothing for the asset, so is the basis what he paid, zero? what Smith paid, $100,000?, what it was worth when Smith, Jr. inherited it, $1,000,000? Let’s say the tax rate is 25%. On one scenario, Smith, Jr. pays $300,000, on another $275,00, on another, $50,000?
Take a wild guess what the answer is. Then ask yourself why it’s “class war” only when you’re on the losing side.Report
“Have you ever heard of the concept of “basis”?”
I have, and since you’re someone who typed a whole lot of words about it, I’d have thought you’d be aware that the basis for inherited investments is reset (“stepped-up”, they call it) to the value at the time of inheritance. Smith’s estate has to pay taxes on the value of the asset at the time of Smith’s death (although Federal estate tax currently doesn’t hit until your estate is larger than eleven million dollars; states all have their own ideas about it) and that’s why the basis is stepped up for Smith Jr.Report
“Federal estate tax currently doesn’t hit until your estate is larger than eleven million dollars”
Which is an excellent example of the sorts of complexities that should be eliminated.Report
What if the estate is a house? Lotsa houses are worth more than $1mm for a round number. What should we do?Report
if you think “you don’t have to pay taxes on the first so-much money from your estate” is a complexity then I’m not sure what we can do for youReport
Wait till we get to skip-the-gen trusts!Report
Well, yes, I knew that. But I thought it would be more fun for readers to connect the dots for themselves. I’m betting most of them did.Report
The first rule of a bureaucracy is to protect and expand the bureaucracy.Report
Please don’t cite ProPublica for anything.
Literally the first line in the article is “The IRS audits the working poor at about the same rate as the wealthiest 1%”.
That’s…presented like a bad thing, presented as some kind of grievous money-dick-sucking moral transgression, that the government’s rules apply and are applied equally to all citizens.
Do higher-income taxpayers commit tax non-compliances at greater rates than the poor? Are there significant resources being lost to tax non-compliance by the higher-income group, to the extent that it would justify a greater degree of scrutiny to that group? And would this non-compliance be something that additional audits would find, or would it just be slightly more money that the high-income taxpayers would have to spend on tax professionals?
ProPublica doesn’t know and doesn’t care. Rich Bad, Poor Good, that’s the extent of their analysis.Report
ProPublica consistently finds 19 out of 2 legitimate scandals.Report
The $$ being reported automatically makes it more likely that more non-compliance resources are lost. I imagine income stratum wants to cheat at about the same rate. Those with more cash just have more opportunities.Report
Oh come on, really? You so little of those of us in the federal bureaucracy that you are going to keep flogging this sad tired dead horse? Really?
Because here’s the thing – with the exception of the Pentagon – whose budgets have been growing over the last decade, federal agencies are now getting really good at doing less with less. Why? because the funds the do get form Congress are going more and more to private sector contractors who are doing public sector work – mostly because congresses and presidents past thought it was a great way to bolster the private sector. There are 2 million or federal civil servants, and at least that many private sector contracts doing the work. I suspect a good many are doing those low level audits and getting a fed to sign off on them.
But sure, its an entrenched bureaucracy that’s ALWAYS the flippin problem.Report
those of you in the federal bureaucracy are like everyone elsewhere: there are many good one, a few bad ones, a bunch in wide spectrum in between, and an unwieldy system that is not above criticism.Report
Then lets criticize the system, not the individuals. The way you wrote that makes it seem like we are engaged in massive purposeful fraud directed at US Tax Payers. Which we aren’t. And its tiresome.Report
Given the relationship of TurboTax to the tax code, I’m not sure that “engaged in massive purposeful fraud directed at US Tax Payers” is that bad of a description.Report
Don’t recall seeing Andrew saying anything about the people in the bureaucracy, only the bureaucracy itself.Report
Because no people were involved in the creation of the bureaucracy and its rules.
It just sprang up out of the ground, like mushrooms. Or cancer.Report
I’d be curious to see what the ROI is on the money spent in each group. For every $1 spent auditing the working poor, how much additional tax revenue comes in? Same question for the wealthy. That seems like a pretty important question if we’re trying to determine where to spend the IRS’s money with regards to audits. Related to that — but probably far harder to calculate — is the ROI via deterrence. How much more do people pay in their taxes based on the risk of being audited? How is this impacted if their odds of being impacted go up or down?
I don’t know what the answer to any of these questions are and even if I were to speculated, it’d be pretty uninformed. But I’m fairly confident we have the answer to the first set and reasonably confident we could get decent estimates for the latter set.Report
I looked it up, and it seems that the primary trigger for EITC audits is a child being claimed as a dependent by more than one household. This is trivial to detect, since they can just cross-check returns in their database and automatically generate letters to send to the households that made the improper claim. This costs virtually nothing, and if you have multiple households claiming the same child, there’s definitely something wrong that is resulting in underpayments to the IRS or overpayments from the IRS on the order of hundreds or thousands of dollars per child.
This seems eminently reasonable, further lowering my already very low opinion of ProPublica.Report
This is an easy mistake to make. My ex and I (well, really, me) did this one year by accident. Her return got held up, I got a letter to make a correction and pay the additional taxes owed. Pretty easy to resolve and likely low-cost for the IRS. I don’t think it was the EITC but it still mattered.
However, where are you getting the “hundreds of thousands of dollars per child”?Report
Hundreds or thousands.Report
Doh! Sorry. Yes, I believe ours amounted to a $600ish change on my end.
However, the error was caught before my ex was able to file hers, which means there was no risk of additional monies paid out.Report