Misdirected IRS Eyeball
The Internal Revenue Service has stood common sense on its head when it comes to auditing taxpayers. Last year, for the first time, it audited a greater percentage of poor taxpayers than rich ones. Among those with incomes below $20,000, 1.36% of returns were scrutinized. Among those making more than $100,000, only 1.15% were audited, according to the Transactional Records Access Clearinghouse at Syracuse University. But don’t blame the IRS for this nuttiness. It was simply doing what Congress, supported by the White House, ordered it to do in 1995.
The main reason was a suspicion that the earned income tax credit was going to people who weren’t entitled to it. The earned income tax credit is a kind of negative income tax that lets the working poor get money from the Treasury even if they paid little or no tax during the year.
The IRS estimates that from 20% to 25% of returns claiming the credit are fraudulent or contain errors. Last year it spent more than $140 million examining those returns.
Meanwhile, it was neglecting other responsibilities. Audits of corporations and the self-employed, the latter especially a category where income underreporting is widely suspected, recently hit new lows. Levies on bank accounts and paychecks as well as property seizures for noncompliance with the tax laws have also fallen significantly.
The sharp decline in enforcement is due partly to the shake-up that followed disclosure in 1997 of widespread bullying of taxpayers by the IRS. To make the agency friendlier, personnel were shifted from auditing and similar functions to handling phone queries and the like. But the main reason that enforcement fell is because Congress wanted it to. In 1995 it banned any new studies on taxpayer compliance, denying the IRS key information needed for assessing how much cheating is going on and where. And it helped make sure audits would decline by failing to provide the money the IRS needs to process a growing volume of returns and manage an ever more complicated tax code, written by Congress. The IRS’ permanent staff hasn’t increased since 1983, even though the number of returns it handles has expanded by one-third.
The IRS estimated before its enforcement budget was brutalized that it recovers $6 for every $1 it spends in looking for cheating and errors. For the coming fiscal year it seeks a 9% budget increase to improve its ability to enforce the tax laws. The fact is that IRS priorities, largely under congressional directive, have become absurdly skewed, almost criminally so.
Tax cheating by the poor should of course be nailed. But it defies logic to suggest that this is where the problem is greatest. The problem is greatest where the biggest bucks are involved, and that’s exactly where enforcement is most lacking.