Following the series of articles from ProPublica that I discussed earlier, members of Congress have questioned the IRS commissioner Charles Rettig as to why its audits are increasingly being directed away from the very wealthy and more towards the poor.
“How can the Congress stand by a tax-enforcement system that punishes working people and gives the wealthy a green light to cheat?” asked Sen. Ron Wyden, D-Ore., ranking member of the Senate Finance Committee, during his opening statement on Wednesday.
Wyden demanded that Rettig produce a plan within 30 days on how his agency will change a system that is “stacked in favor of the wealthy” and “against the most vulnerable.” Rettig promised to do so.
Rettig’s explanation for this practice of largely targeting poor people who claimed the Earned Income Tax Credit was not convincing.
But the IRS estimates that of the more than $70 billion paid out last year through the [EITC} program, $18 billion was claimed improperly, Rettig said. This made the program a priority for the IRS to audit, he said. As previous IRS commissioners have done, he blamed the complexity of the law as the main cause of those incorrect claims.
While that $18 billion figure sounds impressive, experts within and outside the IRS have argued that the agency’s estimate is far too high, largely because low-income taxpayers are much less likely to have competent representation to dispute the IRS’ conclusions.
The $18 billion is also just a pittance when compared with the vast universe of unpaid taxes. The IRS produces an estimate of what it calls the “tax gap,” which is how much tax is actually paid compared with what should have been paid. It’s been a few years since the last estimate, but assuming the rate of compliance has not changed (if anything, it’s gotten worse), the tax gap in 2018 would have been between $600 billion and $700 billion. At most, incorrect EITC payments account for around 3% of that.
By comparison, in 2017, the last year for which data is available, audits of EITC recipients accounted for 36% of all audits.
Let’s hope that because of this scrutiny, the IRS changes its practices to target the really wealthy.