Why Is the IRS Auditing the Poor More Than the Rich?

AP Photo/Jon Elswick

A portion of the International Revenue Service (IRS) 1040 tax form

Just in case you didn’t have a clue who Donald Trump’s friends are, a peek into the recent enforcement actions and inactions of the Internal Revenue Service will offer some guidance on this matter.

Budget cuts have crippled the IRS over the past eight years. While the number of tax returns filed each year has grown by 12 percent in the past decade, the number of agents able to conduct face-to-face audits of taxpayer returns has fallen by 25 percent, from 16,000 to 12,000. Moreover, according to data collected and analyzed by a tax watchdog group at Syracuse University, the targets of these audits tend not to be large corporations and the wealthy but the proverbial “little guy.” 

In particular, the IRS has been beefing up its audits of Americans who claim the earned-income tax credit (EITC), which supplements the salaries of low-income workers. (To be eligible for this program, household income can’t exceed $35,000.)

No doubt, the Administration is concerned about the estimated $17 billion in improper payments made to EITC recipients each year. A large chunk of these payments are the result of taxpayer error, however. The agency itself acknowledges that the primary cause of the problem isn’t fraud, but the difficulty in filling out the complex forms. Many think they are eligible, when, in fact, they are not. Conversely, 20 percent of those who are eligible don’t seek the credit.

Since the 1990s, congressional Republicans have focused on these improper payments to EITC recipients as a major problem and have harshly criticized the IRS for failing to reduce them. In 2015, the Republican Congress passed, and President Obama shamefully signed, a bill that required the IRS to hold EITC refunds until February 15 each year. The purpose was to give the IRS more time to match tax returns with the corresponding W-2s to avoid misstatements of income. 

Consequently, EITC recipients were audited in 2017 at twice the rate of taxpayers with income between $200,000 and $500,000. Only households with income above $1 million were examined at significantly higher rates.

Those who follow the massive $250 billion-a-year underground economy, like Harvard economist Mihir Desai, maintain there would be much bigger bang for the buck if these same resources were devoted to pursuing offshore accounts and other scam tax shelters. Desai points to evidence he has collected that shows that corporations have managed to avoid as much as $54 billion in taxes yearly by hiding about $155 billion in profits in tax shelters. 

It is undeniable that the IRS is in dire need of increased funding so it can go after the big fish. But Congress—Republicans and Democrats alike—has historically starved the agency of the funds it needs to pursue major tax cheats. Is it any wonder, then, that tax avoidance has become a national pastime? It turns out that the worst offenders are businesses. The IRS estimates that only 37 percent of the taxes they owe are paid. Hundreds of billions of dollars in government revenue are lost in this way. This unreported income is where the real money is. 

The long-term effects of tax avoidance are not healthy for a democracy, especially with so much red ink in the federal budget. 

Several decades ago, New York hotel queen Leona Helmsley famously told one of her housekeepers, “We don’t pay taxes. Only the little people pay taxes.” With Donald Trump in the White House, her words ring even truer today.

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