Most U.S. citizens decry the taxes they pay to the IRS to fund government operations. Most will argue that the uber rich – the 1% – get away with more tax fraud than the average U.S. worker. As perception, it seems that way. Most anyone will agree that the U.S. tax system is too complex. Because of that, a transparent reliable study to ascertain if the rich get away without paying their fair share of taxes is impossible. There is no way to compare the uber rich with the average taxpayer because of the complexity of the tax system. Thus, the feeling that the rich get away with not paying their taxes persists.
ProPublica published an article on Tuesday titled; “IRS: Sorry, but It’s Just Easier and Cheaper to Audit the Poor”. Obviously, the article’s title gives away the premise. But the letter from the Department of the Treasury dated September 6, 2019 to the Senate Committee on Finance included in the article provides some interesting information that U.S. taxpayers should understand.
The two important takeaways are that the tax returns of the poor are easier to audit. The other takeaway is that complexity is the other reason why the IRS seems to focus on the poor.
According to the IRS letter to the senate, the IRS agents who audit tax returns have declined by about 30% since 2010.
In 2010 there were about 11,000 IRS agents tasked with auditing taxpayers. In FY 2019, there are only about 8,000. The IRS tasks agents according to their tax knowledge ranging from entry-level to highly experienced agents. The easiest tax returns that usually include child and other tax credits are audited by Tax Examiners. Tax Examiners are the least trained IRS auditors and almost always conduct their examinations via letters. There are 969 Tax Examiners in FY2019, according to the letter to the Senate.
Small business owners and those who report tips are usually audited by Tax Compliance Officers who have a little more training. There are 573 TCO’s in FY 2019. The Revenue Agent is the one that audits the highly complicated tax returns of the partnerships, corporate and other “high wealth” taxpayers.
There are 6,463 Revenue Agents.
As you can see, there are significantly more Revenue Agents targeting the uber wealthy than there are going after the normal taxpayer. But, as the letter lays out, auditing of wealthy tax returns requires “substantial accounting skills,” “voluminous records” and “extensive time”. They may also require expertise such as engineers.
In other words, they are expensive.
Because of this, the IRS targets “egregious” tax cheats within the uber rich to investigate.
In other words, if it looks like a tax cheat within the wealthy, then the IRS will target them. Otherwise, they do not seem to bother.
Obviously, the IRS wants more money to fund more tax compliance auditing.
Like all legal compliance, the enforcers always go to the “lowest hanging fruit,” i.e. targets to show how effective they are in their jobs. The less money you make the easier it is for the IRS to determine if you are complying with your tax obligations.
It’s not the cheaters, it’s the goddam law that allows egregious tax avoidance by the hedge fund set. Especially the carried interest provision that allows, e.g., Mitt Romney, to pay a lesser percent tax than the typical middle class taxpayer. In his case 13.5% on zillions. Even Warren Buffett said that his admin paid more tax than him.
Both parties loved this tax provision and will defend it to the death. It’s their largest donors.