January 06, 2021
In May of 2019, ProPublica published an article stating that the IRS audits wealthy people far less than it audits the tax returns of those who claim the Earned Income Tax Credit, or EITC. As a response to this, in 2020, Democrats in the House of Representatives called for additional IRS funding, so the organization could increase the number of wealthy taxpayers they audit in order to find shortcuts and credits that they fraudulently claimed, causing them to pay far less taxes than they should.
President Donald Trump had to submit his tax returns in response to subpoenas in New York State. Those records, which leaked to the press, showed that despite his wealth and income, the President only paid $750 in taxes in 2016, and hardly anything at all for many years prior to this, because he offset his earnings with business losses.
However, when it comes to finding loopholes in the tax code, the President is hardly alone. Although statistics are hard to come by, it’s clear that those on the higher end of the earning scale – the top 1% – have the ability to hire tax professionals who find legal loopholes or fabricate information to allow them to pay less in taxes, percentage wise, than citizens who earn less money. The Democrats in Congress want to put a stop to this practice by increasing the number of audits that the IRS can handle each year.
The ProPublica Article
When it was released in 2019, the ProPublica article about IRS audits released quite a bombshell. As it turns out, the IRS audits those at the lower income end of the spectrum far more than those in the upper 1% of all earners. Looking at the numbers, between 2011 and 2018, the percentage of those audited who exist at the upper end of the spectrum, earning ten million dollars and up, dropped by 78%, while the percentage of those in bracket right below them, earning between five and 10 million dollars, dropped by 80%. In contrast to this, the percentage of lower income earners, making less than $20,000 each year and thus eligible for the Earned Income Tax Credit, only dropped by a mere 34%. This is a large contrast to those in the upper earning brackets, making it clear that the IRS audits lower income people more, allowing those who make more money to slide by.
In fact, when the percentages of those who are indeed selected for an audit are examined further, those who declare the Earned Income Tax Credit were audited 1.4% of the time in 2018, while those in the 1% category were audited 1.6% of the time. Compare this to 2011, when the percentages were at 2.1% for EITC claimers and 8% for the highest earners. That’s quite a difference between the years. So, why have things changed so much?
Besieged by Budget Cuts
According to the IRS, as explained in the ProPublica article, there are several reasons why they choose to target lower income tax payers for audits. The top two reasons are budget cuts and a lack of personnel, rounded out by a third reason – low income earners are easier to audit.
Over the past decade, the IRS has been besieged by budget cuts. As a result, there’s less money for proceedings like audits, which usually require an agent or two to go out and examine the financial records of the taxpayer in question. In addition, as seasoned agents have retired, fewer have been hired to take their places, leaving the IRS without a number of the experienced people that it needs in order to conduct an audit in the first place.
On top of all of this, it’s far easier to audit someone who makes less money. In many cases, the IRS simply needs to send them a letter stating that they are being audited and request that the information and records needed are sent to them. Compare this to someone who makes far more money and has a larger amount of records, and thus a more complicated tax return. In order to audit them, the IRS needs to send out several personnel, often in person, to spend days to weeks going over their financial records and double-checking their tax returns. This takes more manpower and costs more money – two things that the IRS is currently short on.
The Democrats Plan for Increasing Tax Liability Fairness
Enter the Democrats in the House of Representatives. After reading the ProPublica article and realizing just how many people in the top tax brackets are getting away with cheating on their taxes, they want to reverse the situation. By providing the IRS with the money needed to hire more agents and conduct more audits, they can then expand their reach and audit more individuals at higher income levels.
The Congressional Income Office ran some numbers and determined that if the IRS’s budget for audits is increased by 20 billion dollars over the next decade, then the IRS would be able to triple that investment by bringing in over 61 billion dollars through its auditing efforts. Going off of this, if the IRS’ budget was increased by 40 billion dollars over that same amount of time, they would likely bring in 106 billion dollars as a result of finding the people who have been cheating the system and insisting that they pay their fair and proper share of taxes. The numbers make it clear that this would be a worthy endeavor.
Some of the additional numbers brought up by the Congressional Income Office and the Democrats in the House of Representative point out just how problematic it is to target lower income earners for audits over wealthier ones, simply because of the ease of the auditing process. According to the IRS’s Criminal Investigation division, there was a 28% increase in the amount of people purposely submitting incorrect tax returns in 2020. This percentage added up to over 500 million dollars that was paid to the IRS as required, making the total lost due to tax fraud an astounding 2.3 billion dollars in one year alone.
It’s obvious that something must be done in order for the IRS to crack down on those who purposefully submit fraudulent tax returns in an effort to keep more of their own money out of the hands of the federal government. The House Democrats believe that this should not continue, but will they be able to increase the funding for IRS audits? Only time will tell.
If you have any questions about the Democrats plan to pursue wealthy tax evaders, need to file some prior tax returns, or deal with any urgent or non-urgent tax-related issues involving the IRS, reach out to the tax advisors at Enterprise Consultants Group. We have many years of experience in the field and can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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