This chart comes from a report released a couple of days ago by Policy Impact, a think tank dedicated to standardized analysis of public policy. It shows how much it costs to perform an IRS audit:
Up through the middle class, the cost of an audit is the same as the amount brought in. Net revenue is zero.
Above that, revenue is higher than cost by a few thousand dollars per audit. It adds up, but it's still no great shakes.
Finally, when you get above the top 0.1%—those with incomes of $3-4 million—you're talking real money. The cost of an audit is about $15,000 while the revenue it brings in is $95,000.
This is why Democrats want to increase funding for the IRS. It's mainly targeted at boosting the number of audits on the very rich,¹ and that's where the money is. Audits of multi-millionaires cost a little more, but on average they bring in about $80,000 per audit.
¹It's also aimed at backfilling positions lost over the past decade and increasing the number of telephone support workers.
But Republicans want to Defund the police. First IRS auditing, then the FBI and DOJ.
And the ATF. And the EPA.
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It has been about a year since Kevin last talked about IRS headcount, or at least since I went ahead and created: https://docs.google.com/spreadsheets/d/1QCDTT2M0-xb2KeLdmdVyj4nsAfnrRiPWV1B2-ZLH9qw/edit?usp=sharing I've added FY 2022.
So the Willy Sutton question I suppose - (why) does the IRS audit anyone at the median or below? Why not take the time and effort of those audits and shift them?
Moral hazard. More little fish will cheat if there is no enforcement effort whatsoever at their income level.
By law, they have to audit a certain percent of people taking the earned income tax credit (based on the children they claim as dependents?). That was a requirement Republicans insisted upon.
Also, the IRS can favor employees who do more audits than fewer audits and so doing simpler, e.g. people with lower incomes, audits means they're easier to do. This also applies to who gets the most "wins", i.e. find mistakes. Going after wealthy people can end up taking lots of time as some fight and appeal and... The IRS may be able to get more money in the end, but auditors performance will take a hit until all the appeals are done. So a culture change is needed.
The ways wealthy can move money to hide it from the tax man are also the ways used by criminal organizations. Send the IRS after the money the drug cartels make, and you might trip up wealthy Americans and a favored oligarch.
Too bad the IRS doesn't get to keep a fraction of the earnings - 33%, say. This would skootch them toward self-sustaining status like the USPS and would motivate them to go after the worst offenders.
I believe this captures the direct cost (professional hours x wage etc) and direct revenue (average payment, including penalty, after an audit etc) associated with an audit.
I suspect the indirect revenue, the change in behavior in folks NOT audited is likely substantial: peoples who don't cheat on their taxes because of their perception of risk associated with a potential audit.
So yes, auditing higher income folks likely yields more money, in a direct sense. However, a system that allows a high error rate probably results in non compliance, an indirect cost. For example, " IRS estimates that between 21 percent to 26 percent of EITC claims are paid in error." This high level of EITC error rate likely has an indirect impact on taxation, much broader than just the EITC.
https://www.eitc.irs.gov/tax-preparer-toolkit/frequently-asked-questions/fraud/fraud#:~:text=More%20In%20Frequently%20Asked%20Questions&text=IRS%20estimates%20that%20between%2021,claims%20are%20paid%20in%20error.
Actually, I've seen comments that most simple claims should not require filing a tax return. If you are hourly or salaried worker, the IRS already should have all or most of the data required to calculate your income and tax. (Unless your employer(s) are cheating - in which case I suspect tackling THEM is much more productive use of IRS audit capability - and if you're the one stiffed, IRS pays you out of the penalty on the company - a real government service!)
I already get forms from various lenders that ALSO go to the IRS, and those could be used to add in deductions. Local taxes are harder, but it might be worth going the W-2 path on this, at least for large ticket items. Small but cumulative taxes for deduction could be harder, particularly for people who have to rely on cash.
Our taxes are moderately complex, but most of the deductibles already involve things reported to the IRS.
Hmm - IRS also has a portal for making estimated tax payments. I wonder if self reporting small but deductible taxes could be submitted to a simple portal to be accumulated by the IRS and automatically added to the automatically calculated return.
Interesting thoughts, if you want to make things easier for lower income and middle class alike.
DButch - I agree. The vast majority of workers COULD have their tax form completed automatically at both the state and federal level.
Estimated taxes are mostly for the people whose taxes are not easily calculated by the IRS.
The IRS cannot know the business expenses associated with income reported on a Schedule C, for example. This is also why this sort of return is so easy to lie on (though obviously much harder if you want to be audit-proof).
Still, those of us with significant Schedule C income are a small minority of the population, even if some politicians (R's especially) often try to pretend otherwise.
This, but there's more.
The people who are audited are less likely to screw around with their taxes in the future, AND others not audited realize that they're now more likely to get caught and are also less likely to screw around. Those secondary effects are a bigger deal than what's recovered from the audits themselves.
But I read suggestions that the IRS actually could still do the planned audits by shifting money around. That's why Biden agreed to this cut. Anyone know if that's correct?
And let's join in contempt of a party whose priority (of all the things they could've asked for in the deal) is making it easier for rich people not to pay taxes. Words fail me ...
This is another one of those things that should be a no-brainer.
R’s want to put restrictions on the average person’s ability to get help, because we can’t trust someone with a few hundred dollars a month. But people who cheat on million’s in taxes, well, that’s just fine with us.
There’s something wrong when the D’s can’t get that message across.
The something wrong being Faux News and its ilk, which never report the issue honestly. The people who need to hear about it never do, because of the echo chamber they live in.
The total cost of the earned income tax credit, which drives most audits of low income people, is under $100B/yr. 25% of < $100B is less than $25B/y. Janet Yellen estimates total uncollected federal income taxes at around $700B/yr and says most of it is due to malfeasance by high income people and big corporations.
Moreover, the IRS estimate of the EITC claim error rate is based on what percentage of claims they are able to deny when they audit the claimants. Since these people are working low paying jobs and taking care of children, they can have a lot of difficulty rounding up the paperwork demanded by the IRS. They certainly are going to have a hard time finding a lawyer to help with a claim worth a couple of thousand dollars. It seems that quite a few of the EITC claimants the IRS rules against don't even realize they are being audited. This is all to say that the error rate the IRS reports is bogus.
The IRS focus on EITC enforcement is said to stem from several factors:
It's cheap and easy to go after poor people.
There is some 2015 legislation that mandates an enforcement focus on EITC recipients,
The IRS is always being hounded by Republican politicians on this issue who can't stand the idea that someone poor might get a nickel they don't "deserve".
Some of this is in here: https://www.propublica.org/article/irs-now-audits-poor-americans-at-about-the-same-rate-as-the-top-1-percent
SC Dem - while I agree that the EITC overpayment rate is likely over hyped, I do find the error / fraud rate problematic. If the IRS self reported fraud rate is wrong, do you have superior data?
A business that overpays 20% plus percent of payments would not stay in business...
Well this paper suggests that 15% might be closer to correct: https://www.documentcloud.org/documents/6023996-Effects-of-EITC-Correspondence-Audits-on-Low.html
If this is the case, then about 40% of the people having their credits disallowed should have gotten them.
In any event the question of whether the true rate of over payment is 5% or 50% is beside the point. Kevin's chart shows that the rate of return on on auditing the poor is zero. On the other hand, the rate of return on auditing the rich is 850%.
It would be nice to think that the folks running America's big businesses would be able to work out that a 850% rate of return is better than 0%, but I've spent over 4 decades working for pretty big companies and I've seen no reason to believe that is true. CEOs need to know how to bullshit, not how to add and subtract.
You may have heard of the Pareto Principle. It suggests that you attack the big problems first since that gives the biggest bang for the buck. That says we should go after the rich and I'd rather go after the rich than the folks having a hard time putting food on the table and keeping a roof over their heads.
"850% rate of return is better than 0%"
Apparently they teach a kind of special math in MBA school. I have also learned from articles in the NYT for ex, that it's hard to live on $400,000/year.
Many years ago I had EITC credits disallowed, and could not understand why. When I called the IRS, I was told it was because I was too young to claim the credits -- less than one year old. I pointed out that I had been paying taxes for more than a decade (without ever making an EITC claim), and that I was, of course, speaking with the IRS on the phone. Those would argue against my being less than one year old. The person on the other end of the line suggested that this was likely a problem with my info at the Social Security Administration, which turned out to be the case.
Why SSA "corrected" my age was never discovered, and I never did get those credits.