I have never been audited by the IRS. Many people fear getting audited because even if you have done nothing wrong, you might get tripped up by the complexity of the tax laws and make a mistake and an audit reportedly requires you to produce all manner of supporting documentation. You would think that the people who are most likely to get audited are the very wealthy who are in a position to deprive the government of large amounts of revenue by all manner of devious practices, because even though the tax system favors the rich, they still want to avoid paying even what the tax laws rightfully requires.
You would be wrong because this is the US where the rich get favor upon favor piled on them. Over time, the Republicans have successfully cut the IRS budget so that not only are its services to the general public (such as help desks) drastically reduced, but the number of audits they carry out has also declined. But even worse, as this ProPublica reports says, the IRS is increasingly targeting for auditing low-income people more than the very rich. It especially targets people who claim the Earned Income Tax Credit, the program aimed at helping the working poor by giving them supplemental income.
Budget cuts have crippled the IRS over the past eight years. Enforcement staff has dropped by a third. But while the number of audits has fallen across the board, the impact has been different for the rich and poor. For wealthy taxpayers, the story has been rosy: Not only has the audit rate been cut in half, but audits now tend to be less thorough.
It’s a different story for people who receive the EITC: The audit rate has fallen less steeply and the experience of being audited has become more punishing. Because of a 2015 law, EITC recipients are now more likely to have their refund held, something that can be calamitous for someone living month-to-month.
…Generally, the more money you make, the more likely you are to be audited. EITC recipients, whose typical annual income is under $20,000, have long been the major exception. That’s because many people claim the credit in error, and, under consistent pressure from Republicans in Congress to curtail those overpayments, the IRS has kept the audit rate higher. Meanwhile, there hasn’t been similar pressure to address more costly problem areas, like tax evasion by business owners.
…In 2017, EITC recipients were audited 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.
Put another way, as the IRS has dwindled in size and capability, audits of the poor have accounted for more of what it does.
Humphreys County in Mississippi is one of the poorest counties in the nation, with a median annual household income of $26,000, yet it has the highest audit rates in the country, 51% higher than Loudon county in Virginia which has the highest median income of $130,000.
The five counties with the highest audit rates are all predominantly African American, rural counties in the Deep South. The audit rate is also very high in South Texas’ largely Hispanic counties and in counties with Native American reservations, such as in South Dakota. Primarily poor, white counties, such as those in eastern Kentucky in Appalachia, also have elevated audit rates.
The states with the lowest audit rates tend to be home to middle income, largely white populations: places like New Hampshire, Wisconsin and Minnesota. Generally, the IRS audits taxpayers with household income between $50,000 and $100,000 the least.
When we came to the US in 1983, we arrived at the end of September. When we filed our taxes next year, our income qualified for the EITC but I did not claim it, reasoning that although I was technically entitled to do so because of our low income, the EITC was designed for people who were reporting their income for the full year whereas mine was low because it was for just three months. But when I got my refund, some kindly person at the IRS must have thought I was ignorant of this benefit and added it to my refund. I doubt that would happen now.
The dirty secret is that, proportionally, nobody gets audited. The reason the poor get audited more often is (other than just corruption) their taxes are simpler, and the computers can flag them for audit more easily. Rich people’s taxes are practically un-auditable (by design) because they are so complicated.
I know a penny trader who used to drill the pages of his stock transactions with a drill press, and put a great big threaded rod with washers and nuts through it to hold them together, then submit 20,000 page tax returns. He never got audited once. There was probably nobody at the IRS who could even move his return. Auditing a return like Trump’s or the Clintons would keep dozens of people busy for years. That’s by design.
Coincidentally, I just queued up a posting about Trump’s tax returns for tomorrow morning, over at stderr. The situation is worse than it looks and it looks bad.
I know what the narrative is supposed to be, but…
So, uh… yeah. Generally, the system is working.
So let me get this straight -- there’s a cohort of people which is
(a) relatively large (there’s a lot more poor folks than rich folks)
(b) easy to audit (no complex affairs to analyse, see Marcus Ranum’s post @1)
(c) unlikely to have the resources to challenge the audit (poor folks don’t retain tax lawyers) and crucially
(d) admittedly many of them are making false statements to the IRS (“claiming the credit in error” is another way of saying “evading some of their taxes”).
I’m just an engineer, but that strikes me as exactly the way it should be. Your resources for auditing are limited. It makes perfect sense to optimise their application by making sure they pursue, mainly, one of two kinds of target:
1. high-volume easy wins
2. high value, rarer and more time consuming cases.
People earning between £200k and £500k clearly don’t fall into either of those categories. There aren’t enough of them, and the payback for catching them isn’t worth the extra effort.
Also, given that pattern, it’s obvious that the counties with highest audit rates will be the poorest. If there’s a county with mostly middle-income people and one or two billionaires, it would only take ONE audit with a significant recovery from one of those people to get back more than the entire amount recovered from one of the poor counties.
If you think about the maths and apply some common sense, this is a non-story.
The point of the story is that cutting the IRS budget and thus reducing the number of staff auditing people was designed to achieve just this end of reducing audits on the better off.
Congress is not stupid. They knew this would happen when they cut the budget.
Donald J. Trump, Sr.
@2 sonofrojblake
If we look on this as a return-on-investment situation, going after a bunch of poverty-stricken souls who may well have made a simple error vs going after major tax dodgers where the Govt might recoup millions per audit then picking on the EITC is stupid.
There is essentially no deterrent effect since it is unlikely most EITC claimants are aware of the audits. All it does is play to the Republican base who “know” all those welfare people are ripping off the government.
Overall, it strikes me as a disgusting waste of government resources.
@jrkrideau: you didn’t read my comment. Or the original post, for that matter. Try again.
In fairness to you, the headline is misleading, and you do have to read carefully to answer it correctly.
Who gets audited the most?
“households with income above $1 million were examined at significantly higher rates”.
Not the conclusion you’d guess if you skimmed the article with a pre-determined idea of the answer you wanted to read.
Also relevant: the IRS staffing was gutted in retaliation for going after a billionaire
https://www.propublica.org/article/ultrawealthy-taxes-irs-internal-revenue-service-global-high-wealth-audits
Again I’m just an engineer, but if I was in charge of the IRS I’d deploy my staff based on the idea that there are basically five classes of citizen:
1. people too poor to pay tax, or too poor to pay enough to make it worth ever recovering. I assume there are a LOT of these people.
2. people who pay tax and have relatively simple affairs, and “get it wrong” (i.e. evade tax) often enough, and in large enough numbers, to make it worthwhile pursuing them. There are probably the largest group on numbers alone, quite probably more than half the entire workforce, so it makes sense to make sure they get audited frequently enough to catch the “mistakes” and evaders.
3. a group right in the middle, who have more complex affairs which make them harder to audit. This is the group I expect pay the largest dollar amount in taxes overall, because although there are fewer of them, they pay more. I’d also expect them to avoid/evade less than richer people, because it’s simply not worth it to them. They’re not going to retain a team of accountants, say -- it would cost more than they could ever save.
4. rich-ish people -- people on a million a year or more. Although there are relatively few of these, and their affairs are deliberately quite complex, they’re worth pursuing because individual recoveries are potentially huge, because they can afford to pay people to make their tax “efficient”. For this reason, I’d audit these people the most. Which is what the article does say happens..
5. The super-rich -- statistically a tiny, tiny group, perhaps 0.1%. The people who have the resources to employ some specifically to arrange their affairs to avoid (legally or otherwise) the taxes the rest pay. The people who have the resources to retain lawyers to dispute audits. The people with the resources, in some cases, to retaliate directly against the IRS. I’d pretty much never bother auditing those people, because it’s way more trouble than it’s ever going to be worth. Potential recoveries would be enormous, but they’ll never, ever happen, and if they do, the IRS would regret it (see Marcus Ranum above).
The only question is where you draw the lines between the groups. Apparently group 3 starts at $200k a year and goes up to about $1m a year. I’m going to guess that group 5 starts at something like $50m a year. You can reasonably argue about whether those particular figures are appropriate, but you’ll have a hard time convincing me the five-groups policy outlined above isn’t the rationally optimum way to deploy ANY number of of IRS staff.
You didn’t say much of anything about what the deployment should be like, and what you did say isn’t nearly enough to solve this as an optimization problem. If we were at this stage in an engineering project, I would say you should be a bit less confident about your design. Or that you should first have a design, before you tell us how confident you are about it.
Claims for the EITC are submitted to the IRS, but someone who submits the wrong information isn’t evading taxes.
Step 1: You pay your taxes and don’t evade them.
Step 2: If you qualify, you may receive a credit for having earned income (reported to the IRS, since you had just given them the relevant information).
It is a welfare check. We don’t offer a universal income with no strings attached. The biggest thing we do offer along those lines is the EITC, which does have the string attached that you need to have made a certain amount of income to receive a certain amount of welfare support from the federal government.
(It’s not much, but it’s better than nothing… And by the way, this is going to both your group 1 and group 2. Those in group 1 obviously need as much help as they can get. You can ask yourself whether a person in group 2 is likely to bother with deliberately misreporting, to try to squeeze out an extra $10-100 or some tiny amount like that, given that their placement in this group means an amount like that is even less meaningful than it is to a person in group 1.)
Anyway, you might think it’s best not to crack down hard on people who “get it wrong,” because you understand what this is (a welfare program) and what it isn’t (a tax). We should be providing more support for the people who qualify (even when we include extra given to those who misreport), and the optimal result is not to minimize that amount.
Yeah, I’ve had dealings with people like that. I’d point out you’ve just demonstrated that you’re not qualified to be on the project if you think we’ve even started doing the designing. Presumably you’re from one of the parasitic departments, the ones who couldn’t find the production plant if you put a gun to their head, but sometimes end up on engineering project teams and just waste everyone’s time. I’m going to guess HR? Marketing?
What I’ve stated is a design principle -- a starting point. I have at this point very very nearly zero data to plug into anything. I have no idea of the populations of any of those five groups, the total, average or individual income of each, or any other useful figures. I have a first guess approximation of the *relative* sizes of the groups, but I’d be happy to be corrected. I’ve stated one principle -- that recovery efforts should be concentrated on two of the five groups because one is easier than the rest and one is more lucrative than the rest, in principle. We’re going to put our efforts where the payback is best. The design is where you analyse the data and decide where you draw the lines between the groups, and how much of your workforce (how many are there? I don’t know) you assign to each. You’ve made zero effort at convincing me the principle has any weaknesses.
Re: EITC. My mistake -- from what you describe, and EITC “mistake” is not tax evasion, it’s fraud. I don’t see that that makes any difference to the design principle, but it’s nice to get the terminology corrected. Thanks.
You can call it that, but it can involve simple mathematical error, among other things. This, from people who are trying to get welfare.
I probably should’ve put more emphasis on the point that these groups had been considered separately by you:
But when you talk about the EITC (i.e., the amount paid and the amount of auditing done), it is a discussion about people in both groups. There are people who owe zero taxes and have earned the requisite income to qualify for the EITC. There are people who owe some taxes and have “relatively simple affairs,” who also qualify for for the EITC.
For the first group, you’ve claimed it’s not worth it to try to “recover” anything via auditing. For the second group, you’ve claimed that they should be audited frequently enough to catch mistakes. (Is that all mistakes or something less?)
So you are saying that the EITC group in question both does and does not contain those who should be audited, with some indeterminate frequency. (It’s not a straightforward contradiction, but it’s also not informative, although it seems like you thought otherwise and are still resistant to having your opinions changed.) You decided that this is acceptable — nay, optimal! — by means of a vague a priori principle that says nothing specific about what ought to happen.
How am I supposed to argue with that? If I were interested in finding something wrong about your “analysis,” what types of things would you consider relevant?
For instance, do I have any room to question whether we have any business in getting most “lucrative” outcome, the one with the highest “payback,” when that entails that the lucre goes into the treasury, instead of people who were supposed be getting welfare checks?
May I ask about what the real economic impact of this proposal is? It’s not the same, when poor people have more money to spend (which they will certainly do), as opposed to wealthy people have more money to hoard (and not spend). You say that we “should” maximize the efficiency of audits, whatever exactly that would amount to, but that neglects all sorts of things we should otherwise do with a policy — all things which fall under the umbrella of making it a better society for the people in it, not one where the government simply collects as much money as it can.
OK, I’m beginning to understand your objection a bit better. And I’m very much not resistant to having my opinion changed. You’ll observe I’ve changed one immediately:
Group 1 -- people claiming they don’t earn enough to pay tax, but claiming a benefit can, by definition, only be maybe trying to defraud the system, rather than evade tax. In the UK at least, fraudulent benefit claims run at some fraction of 1% of all claims. In a national budget, it’s a tiny amount, but you can’t morally not police at least a bit. It doesn’t seem to me to be tax auditing as such. But I’m content to permit that since it’s the IRS doing it, then yes, it is, and on that basis yes, they should be audited, but not much -- as I say, the incidence of fraud and error is slight and the amounts recovered would be, in context, tiny. So I wouldn’t completely ignore Group 1, but enforcement attention would be, as a fraction of the whole, minimal.
Group 2 -- way more of them, considerably more money involved because they’re paying tax AND claiming benefits. More chance of confusion, more chance of error. No system is ever going to catch all mistakes, so that’s never a target. Setting targets is something else you could only possibly do with a lot more context and data. But still, in principle, this is probably the group where I’d focus the second highest amount of effort.
The IRS’s job is to ensure that:
1. the government gets the money to which it is entitled according to the law and
2. the people get the money to which they’re entitled according to the law.
So yes, it’s absolutely their business to make sure that they make the most “lucrative” outcome. We’re not talking here about going and taking money from people who are entitled to it. We’re explicitly discussing ONLY taking money from people who’ve claimed it but are NOT entitled to it. Surely you’re not against that? You’re not endorsing fraud?
After that, you get into questions of economic impact and government policy, but that’s not what this is about at all. This is about IRS policy -- whom they choose to go after. Now I fully agree that if you give poor people more money they’ll spend it -- that’s actually part of why many of them are and remain poor. And I fully agree that if you give rich people more money they’ll hoard it -- that’s actually part of why many of them were born rich. But fixing that isn’t the remit of the IRS. It’s a long, long conversation that I predict would end up with us agreeing that capitalism is broken. Right now, though, despite what this posts sounds like its trying to say, the actual facts it lays out seem to describe an IRS doing the best it can with the resources it has. Although you have increased my understanding of the benefit system, you’ve done nothing to change that impression.
These people are not entitled to it, according to a welfare system which is insufficient to address the needs of the people it is meant to support.
When I make a moral/political claim about who should be entitled to such things, I’m not committed to whatever is written into a bad law.
I will endorse the idea that you’re making a mistake here: “this is probably the group where I’d focus the second highest amount of effort.” That is not where we should put our efforts, for the obvious reasons I already mentioned.
And when I “think about the maths and apply some common sense,” I don’t make a quick conclusion that “this is a non-story” and try to hold onto that as long as I can. It’s not clear what math you might think I’ve done wrong in the first place, and I don’t see you doing any actual calculations. But it’s definitely not a non-story. I mean, I read something like this:
… and I just have to wonder how you got it all totally upside down and backward, how you convinced yourself that Republicans must have been taking the rational, responsible, optimal approach (and don’t just have an axe to grind against poor, mostly black/brown folks). Were you reading a different article? Did you think we were talking about Tory policies, or that something you know about that was transferable to the situation in the US? I just don’t know.
Nonsense. People remain poor because our system doesn’t support them as much as it should. If you spend what little money you have on feeding yourself, paying for healthcare, etc., this is not why you remain poor. It’s why you remain alive. But it is money you will definitely put back into the economy, where it’s useful to a whole lot of people, at least until the fucking wealthy funnel it into their bank accounts.
“When I make a moral/political claim about who should be entitled to such things, I’m not committed to whatever is written into a bad law”
What you are asking is for the equivalent of getting the police service to decide for themselves, without reference to government, which laws are morally justifiable. You’re further expecting the police to enforce only those laws, and ignore infractions of others.
No thanks.
I never said a fucking thing about the police. You apparently don’t want to listen, but let me put it to you that the story here (because it’s not a non-story) is that the Republicans were the ones who were abusing how the laws were enforced. In fact it’s not written in stone anywhere that we need to crack down hard on poor people and let rich tax evaders off the hook. But they decided to distort how our system works (when it was already half-broken to begin with), so that it would serve their own interests and let them score points with their hate-filled base. That’s the story.
We can talk all day about how important the rule of law is. I bet we would agree. I don’t want vigilante cops either. What’s necessary for the rule of law to work is that people interpret and enforce our laws in reasonable, responsible, prudent, humane ways. In this case, that’s the opposite of what we actually got (unsurprisingly, if you know the Republican party), and that’s where I have a problem.
I can see why we’re struggling to communicate when you get sweary and indignant and confused by the use of the word “equivalent”.
Oh, that’s unfortunate. That’s a bald claim. And here’s the fact from the article:
I know it seems like longer, but Trump has been President for a little over TWO years. Before that it was well-known Republican Barack Obama in the chair.
And I very much am listening, and reading the original article. For instance -- what you describe as the Republicans “hate filled base” is, I would hesitantly suggest, not composed entirely of people making over a million dollars a year. In fact it’s overwhelmingly made up of people who’ll do well to make a million dollars over their entire working lifetimes.
You ask that the IRS “enforce our laws in reasonable, responsible, prudent, humane ways”. And then you say that what is happening is the opposite of that.
The group audited at the highest rate, per the article, is multi-millionaires, people making annually in excess of ten times what I, a chartered engineer, am making. To me, that’s the epitome of reasonable and responsible and prudent. You’ve fallen for the con in the article, which is to complain about poorer people getting audited at a higher rate than the directly above them, a group in a position to make auditing them considerably more time-consuming and less likely to pay back.
Now I watch you react to my restatement of it, I’m more and more impressed with the literary misdirection at work in the article. Like a lot of magic tricks, when you know how it’s being done it can be surprising that anyone falls for it… but fall for it they demonstrably do.
“THE IRS IS TARGETING POOR PEOPLE millionaires get targeted the most ITS A SCANDAL!!!11!!1!”
So that’s “the fact” from the article, is it? I can quote it too, and this time it will be relevant:
That’s true, and anybody who’s been paying attention since Reagan could’ve told you as much without reading the fucking article. We’re all too familiar with conservatives’ incessant whining and paranoia about “welfare queens” and so forth, which is definitely not something that started with Trump or a particular budget cut.
Before you say it: yes, Clinton and Obama certainly were presidents in that period…. Maybe you think I ought to be stumped by that, but it is totally beside the point.
The issue is with the rest of the distribution, which accounts for most of the population, and it’s not reasonable to disregard all of that. If you’re really going to evaluate the entire thing, cherry-picking one tidbit of information isn’t the way to do it.
What is the title of this post?
Hint: it is NOT “Guess who gets tax audited the second most?”
I guess we’re just not going to agree. Fair enough.