For years, it has been well-documented that the Internal Revenue Service prefers to treat millionaires and billionaires with child gloves.
However, there is another side to the storey: Where does the IRS actually direct its enforcement resources? On America’s poorest households.
TRAC, a nonprofit research data centre at Syracuse University, provides us with the pertinent facts. TRAC has analysed IRS data and discovered that the agency audits households with less than $25,000 in income five times more frequently than any other group.
According to the numbers, audits targeted low-income wage earners, defined as those qualified for the federal Earned Income Tax Credit, at a rate of 13 per 1,000 returns in 2021. For the remainder of the population, the rate was 2.6 per 1,000 returns.
For married couples without children, the current tax year’s qualifying limit is $22,610 in adjusted gross income. Although the ceiling increases with family size, the maximum income for homes with three or more children is $53,057 this year.
There are no words to describe how terrible and wasteful this is. These families are frequently the most financially insecure in our society, trying to pay for basic necessities. They are the least likely to seek expert tax guidance and are more likely to have a low education or to speak English as a second language.
When they receive an IRS audit letter, their only means of obtaining additional information is by telephone. However, as the IRS’s national taxpayer advocate, Erin M. Collins, noted in a recent study, only 11% of callers to the IRS assistance line reached a customer care agent last year.
“Among the fortunate one in nine callers who reached a CSR,” Collins reported, “average hold periods were 23 minutes.” However, this was an average; many callers waited significantly longer.
The financial gain from auditing the poorest Americans is negligible, especially in comparison to the advantages from pursuing the greatest tax offenders — the wealthy.
The Treasury Department estimates the yearly “tax gap” at $600 billion, the difference between what is owing and what is collected. Treasury estimates that 28 percent of that amount is owed by the top 1% of income earners, a group with an average estimated income of roughly $1.5 million, and 20.6 percent is owed by the top 0.5 percent, a group with an average estimated income of about $2.3 million.
Consider that the entire tax gap is equivalent to the income tax paid by the bottom 90% of Americans. Consider this the next time you hear millionaires complain about being required to pay their fair share of taxes.
“The United States collects less tax revenue as a percentage of (gross domestic product) than at any point in recent history, in part due to the size of uncollected taxes,” Deputy Assistant Treasury Secretary Natasha Sarin noted in the Treasury study.
Sarin attributed this performance to “an IRS that is understaffed and using obsolete technology.” As a result, “audit rates have reduced across the board in the recent decade, although they have decreased more for high earners than for Earned Income Tax Credit users.”
There are a number of possible explanations for the disparity. One is that recruiting and training revenue agents, the most skilled category of enforcement workers required to audit the wealthy’s complex returns, is more difficult than recruiting and training tax examiners, who handle more ordinary concerns.
TRAC discovered that the IRS employed 14,749 revenue agents and 12,209 examiners in 2010. The ratio turned in 2016 and has continued to widen since then, even as the enforcement workforce has shrunk in size: By 2021, there will be just 8,642 revenue agents and 12,334 examiners. This has occurred despite a 50% increase in the number of tax returns claiming income of $1 million or more.
Simple mathematics dictates that a relative quantity of staff employees capable of doing only routine examinations results in a greater number of those and less difficult audits. That is precisely what occurred.
Add to it the political attacks on the IRS, often from Republicans, for enforcing the law against the wealthy, and the agency’s persistent underfunding by Congress, and you have a poisonous enforcement regime by design.
It should be self-evident that targeting low-income taxpayers will do nothing in terms of closing the tax deficit. That is especially true given that the primary focus of audits of low-income Americans is not on whether they are underreporting income — the great majority of those taxpayers earn virtually entirely through wages, which are reported to the IRS by their employers.
Rather than that, the focus is on whether taxpayers are correctly reporting their qualifying Earned Income Tax Credit, which is calculated based on earnings and family size. Collins said that 53% of the audits completed in fiscal 2019 involved individuals earning less than $50,000, with 82% claiming the EITC.
The EITC is not a luxury programme, and as a result, the gains from enforcement are minimal. The maximum credit available to childless couples is $560, whereas the maximum credit available to large families is $6,935. Due to the fact that the credit is refundable, meaning it can exceed the amount of federal income taxes owing, many households end up with a negative income tax rate.
Collins stated in her study that nearly all audits of low-income households are conducted via correspondence, rather than calling the taxpayer to meet with an auditor face to face. This may appear to be a benefit to the taxpayer, but it is frequently not.
“The IRS correspondence audit process is constructed in such a way that it uses the fewest resources possible to perform the greatest number of exams — resulting in the lowest possible level of customer service for taxpayers in greatest need of assistance,” Collins wrote.
Correspondence audits of taxpayers earning less than $50,000 are closed without a response from the taxpayer, compared to only 20% of audits of taxpayers earning more than $50,000. As many as 14% of lower-income taxpayers may have failed to answer because they were unaware they were being audited, Collins wrote. Perhaps the IRS letters were returned as undeliverable.
Typically, the IRS does not pursue the matter further; instead, it charges a penalty and increased tax. “A lack of adequate communication was a significant impediment to taxpayers resolving their audits,” Collins’ agency determined after conducting several studies.
By contrast, if you are summoned for a field audit, the IRS will not generally tolerate a non-response and will make every effort to locate you.
There is no way to overstate the corrosive effect that America’s financial status and politics have suffered as a result of an increasingly dysfunctional and unjust IRS.
Average taxpayers, who will spend hours filling out their tax returns over the next month or so, have every reason to dislike the millionaires and billionaires who get away with tax avoidance and who they see laughing all the way to the marina. Doubts about the US government’s commitment to assisting the underdog can only deepen.
Nor have conservatives succeeded in their campaign to eliminate the IRS; as I highlighted recently, some on the right are clamouring for the IRS to receive less funding, ostensibly as a punishment for its inability to perform its duties with the skinflint funding it currently receives. Sen. Ted Cruz, R-Texas, has run on a platform of abolishing the IRS.
Clearly, such proposals will benefit the wealthy by allowing them to retain a greater portion of the money they owe the federal government. The remainder of us will simply receive the bill.