Letting the IRS Do Their Job


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Earlier this year, Citizens for Tax Justice put out a report called "Tax Cheats and Their Enablers." The argument of the "Tax Cheats" publication was that the federal government is being way too lax in going after high-income individuals and corporations who are coming up with clever tax avoidance schemes, and that the IRS has been effectively stripped of its powers to adequately enforce the tax laws.

Last week I got an email from an irate reader who took issue with the report:

I noticed your article does not even mention the Earned Income Credit as a source of Tax Cheats. The EIC is probably the largest source of tax fraud there is. Apparently, your organization is not interested in EIC fraud because it is not perpetrated by wealthy people.

This guy (who will remain nameless unless anyone really wants to know) saw this as evidence that CTJ is hopelessly "biased."

Now, there's a good literature out there making it clear that EITC noncompliance is a pretty unimportant part of the tax avoidance picture in dollar terms. This literature also makes it clear that Congress has actually shown an odd fixation with EITC "fraud" in recent years, and as a result has spent a disproportionate amount of IRS enforcement time and money trying to ferret out this source of noncompliance. See here and here to learn more.

And it seems likely that if EITC noncompliance is a problem, it's not because single moms are trying to bilk Uncle Sam, but because the forms are simply incomprehensible and they're making mistakes. If this is "tax avoidance," it's a whole different kind from companies shifting their income offshore to avoid having to pay US tax at all. And the remedy for this sort of accidental tax avoidance is to simplify the EITC, something Max Sawicky at the Economic Policy Institute has a lot of good ideas about. (See here for more.)

I pointed all this out to my friendly emailer, who (as is typical of folks who accuse us of being systematically biased) never responded.

So a couple of days later, the Wall Street Journal had this on the IRS' newfound ability to enforce federal tax laws. Turns out the IRS is managing to conduct a lot more audits these days, and is targeting proportionally more of them at the high-end tax evaders discussed in the "Tax Cheats"' report. So that's good. Of course, the IRS data cited in the WSJ report also makes it clear that the glass is still half empty: in 2004, the total number of audits was about half the number the IRS managed to complete in 1996. That's better than 2000, when they were at about a quarter of the 1996 level, but still not that good.

An even more sober take on this data comes from the Lansing State Journal, which noted that high-end taxpayers still face pretty low odds of being audited. The Lansing paper also printed this quote from IRS Commissioner Mark Everson which didn't make it into the WSJ coverage:

"If you look at overall audit rates, they're still too low."

We've said it before, but it's worth saying again: Congress' self-serving demonization of the IRS in the late 1990s has set back the cause of effective tax administration a long way. Describing IRS enforcement folks as a bunch of jack-booted thugs is a sleazy way of shifting the blame for the pathologies of our tax system away from the folks who designed it (yes, Congress!) and toward the people whose job is simply to enforce the laws. So if filling out your tax forms makes you mad, don't get P.O.'ed at the IRS. Take your gripes straight to the source: the tax writers in the US Congress.

We know that there are a lot of bad people out there creating and exploiting tax avoidance schemes. Every dollar these guys don't pay is a dollar the rest of us have to pony up. But looking past this reality and focusing on bogeymen such as an out-of-control IRS and a gang of EITC tax cheats is the surest way to ensure that high-income tax avoiders will continue to get away with it.

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