IRS questioned on its audit practices


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.

Comments

  1. ridana says

    I thought this was going to be Congress asking the IRS why it’s taken them 6 years to audit Trump’s 2013 returns. They must still be working on it, right? Cause he promised several times that he’d release them when the audit was done, so…

  2. says

    The IRS auditors are like inverse bank robbers. They go after the EITC because that is where the money isn’t. (Or conversely, they don’t go after the rich because that is where the money, and lobbying, is.

  3. brucegee1962 says

    I have a friend who works for the IRS. It’s pretty much the only federal agency that is self-funding — I think it’s something like for every one dollar you spend on IRS enforcement, you make 1.4 dollars.

    So it will surprise no one to learn that their budget has been ruthlessly slashed. There simply aren’t anywhere close to an adequate number of people on board to go after tax cheats. No doubt this is deliberate on the part of the budgeteers, who wish their millionaire buddies to be able to cheat with impunity.

    I think many IRS enforcers would love to go after the big-time cheats instead of the small fry. But in order to go after folks with big lawyers, you need adequate resources or you’ll just get creamed. So instead, they go after the low-hanging fruit who won’t be able to defend themselves.
    https://federalnewsnetwork.com/agency-oversight/2018/12/draconian-irs-budget-cuts-strains-rollout-of-2019-tax-filing-season/

  4. deepak shetty says

    the IRS changes its practices to target the really wealthy.

    Im not sure if this would result in anything. The rich have created the loopholes and exploit them legally. Unless the law itself changes no additional Tax income will be available from the rich.

  5. Holms says

    #5
    There are also those that go beyond the legal loopholes, and genuinely cheat. Which gives rise to the tax gap: the difference between expected and actual tax revenue.

  6. says

    It’s not that they go where the money is, they go where the targets are easy.

    For example, I pay a pretty substantial amount for the services of an excellent accountant. Part of what comes with that service is, if the IRS sends a letter saying “perhaps there is an error here” it is polite, not demand, and is resolved with a few phone calls I do not have to make. They never have come after me for anything substantial because my returns always include my full share, but I’m not anything like an easy target; I can respond with hundreds of pages of reciepts and documentation for everything, and they’ll have to review it. It’s much easier pickings to have the computer send a letter to everyone who forgets a particular item.

  7. deepak shetty says

    @Holms
    Shrug. I dont understand how the IRS arrives at an “expected value” -- perhaps they hope that Amazon or Apple pays something this year ?

  8. says

    @Marcus No. 7.

    That’s true, you’re absolutely correct. I do much the same with the same results.

    Now, imagine if the IRS would rather not bother with you or me, how they must feel about billionaires with teams of accountants and lawyers. Of course they chase the low-hanging fruit.

    Jeff