Reading the actual study [1], the headline is a bit deceptive. The study looked at audits between 2000 and 2010, a period during which funding to the IRS increased, and found that generally more funding for audits led to more money recovered from audits (duh). But that $34.3B figure is over 10 years, so it's a tiny fraction of a percent of overall federal revenue, and it's not offset by the amount of more money the IRS would have taken to run those audits.
Also unmentioned is the very real negative externalities that IRS audits cause. Audits disproportionately affect poor people [2], who are also the least able to spend time dealing with them. The United States already has extremely low tax evasion rates [3]. Rather than spending money to catch more of the very few cheaters by audits, other country's tax authorities have found "nudge" letters were found to be similarly effective and vastly cheaper.
" IRS audited 6.66% of returns from filers with more than $10 million in adjusted gross income in fiscal year 2018, down from 14.52% in 2017 and even further down from 29.3% in 2011"
Wow, they used to audit 1/3rd of all filers in $10 mil/year bracket? I guess at that level, there aren't too many people with W2 form.
> For those making less than $25,000, the audit rate fell 0.02% (to .69%) from 2017 to 2018.
Frankly, for it to be significantly above 0 seems grossly inefficient. I would assume that average rate of return for public money spent on auditing a millionaire is... a fair bit higher than that spent auditing someone earning 25k.
It’s not insane at all. Note that’s AGI - adjusted gross income.
If we stopped auditing those with AGIs less than $25,000, then all I’d have to do is take enough deductions (retirement contributions, unreimbursed business expenses, medical expenses, loss from property sales, tuition, etc) to get my AGI below $25,000 and I’d never have to worry about being audited.
Ever.
One way to significantly reduce your taxes is to lower your AGI. So if anything, the lower AGIs would be a good place to start looking for tax cheats.
Except that auditing involves tax return in which the IRS has suspicion that there is more income than claimed, right? So of all the people who reported income of less than $25,000, the IRS apparently believed that 0.69% of them actually had income of much, much more. Maybe millions.
Is that the kind of thing that would show up in an audit? That is, if you're hiding millions of dollars, you're not just fudging the numbers. You've got a web of places to stash money that aren't directly connected to you. It would take a deep investigation of your finances, not just an audit.
I hope they have third party data sources (banks, employers, stockbrokers, house/boat purchasers, etc.). By cross referencing the third party data with the contents of your return (automatically), they should be able to make a shortlist of people likely to be failing to declare something.
The reason for this is almost exclusively the Earned Income Tax Credit. A single filer claiming two children and earning $11,000 would be eligible for a (fully refundable) credit of $4,410. While this credit distributes a ton of needed benefit to low-income working families, I'm sure you can see where there's a strong incentive to defraud the system here. Both unscrupulous individuals and tax preparers can make a substantial amount of money quickly.
Since you can claim self-employment income without documentation, regular audits are necessary to prove actual income. It's also common for people to claim children who don't truly qualify; again, this would only be provable through actual audits.
In contrast, the average middle-class taxpayer tends to have both less built-in incentive to game the system and less flexibility (as most of their income will be documented to the IRS).
To defend the IRS a bit more: this program is in some ways an administrative model. Taxpayers don't need to prove any need to claim the credit. There aren't multiple rounds of paperwork, and, if you aren't audited, the only interfacing you have to do with the bureaucracy is in submitting your tax return, and you'll have money deposited in your bank account in a week. It may be the most effective welfare program, even accounting for audits (many of which are triggered by obvious red flags) in its ratio of benefits to "hoops needed to jump through."
As a high net worth business owner, I know a lot of wealthy people. They will simply follow prevailing trends on tax... If most of their peers are avoiding or just not paying tax, they will do the same. It is incredibly important that tax laws be strictly enforced or wealthy people will simply not pay.
Pretty much only form letters should be used for low income people.
At some point you can become wealthy enough that a good accountant is cheaper than paying a good proportion of the tax, in which case it’s not a case of ‘not paying tax’ any more, it’s a case of maximising profit.
The poor can’t afford to do anything but not pay tax, the rich can pay for all kinds of tricks to hide their money from the government while paying some paltry, but still seemingly legit, portion of tax.
Check the New York times reporting on Fred Trump and Donald Trump. It is clear to elites that just outright breaking tax law has no repercussions. More and more wealthy people are understanding this, and will not pay or will underpay taxes.
It's critical that taxes be enforced uniformly and in every case.
I feel that your second paragraph is disconnected from your first. This study is about the IRS audit process for publicly-traded corporation, not individual filers. We can easily fund more audits of publicly-traded corporations while decreasing the number of audits of individuals, even taking care to avoid targeting poor people.
> Also unmentioned is the very real negative externalities that IRS audits cause. Audits disproportionately affect poor people [2], who are also the least able to spend time dealing with them. The United States already has extremely low tax evasion rates [3]. Rather than spending money to catch more of the very few cheaters by audits, other country's tax authorities have found "nudge" letters were found to be similarly effective and vastly cheaper.
That's not a strong argument against audits. I'd just take that to mean the IRS should mainly audit people or businesses based by how large the underreporting was.
Audit based on size of underreporting? That's like saying only buy winning lottery tickets. You don't know how accurate a tax filing is up front; that's why there are audits.
That was worded a little badly. The size of the company, and the size of the tax return should impact the chance of an audit. Intentionally lying on your tax return and saving 5% is a lot different with 100 million than with 10,000. The IRS should also prioritize audits that look fraudulent.
The mandate of the IRS should not be to maximize tax collection, but to maximize economic gain to the United States.
I hope their internal models take into account the cost of an audit which finds nothing, both to the IRS themselves, but also to the audited and their family.
In fact, to make incentives align, maybe they should even pay those who are audited and end up owing nothing.
Also unmentioned is the very real negative externalities that IRS audits cause. Audits disproportionately affect poor people [2], who are also the least able to spend time dealing with them. The United States already has extremely low tax evasion rates [3]. Rather than spending money to catch more of the very few cheaters by audits, other country's tax authorities have found "nudge" letters were found to be similarly effective and vastly cheaper.
[1] https://www.aaajournals.org/doi/abs/10.2308/accr-52520?utm_s...
[2] https://projects.propublica.org/graphics/eitc-audit
[3] https://www.researchgate.net/figure/Size-and-development-of-...