The great Benjamin Franklin once said that there are few things inevitable in life than death and taxes. Nonetheless, like many things in American life, the tax system is also rigged. It shouldn’t surprise anyone that the richest Americans pay less of their income in taxes than the rest of us. Not to mention, rich people are also known to take advantage of various loopholes in the tax code they take advantage of since we’ve all heard about the Panama Papers. But often we don’t realize how screwed up the American tax system could be, especially in recent years.
Over the past 8 years, budget cuts have crippled the IRS. As a result, enforcement staff has dropped by a third and audits have declined across the board. Now since everyone dislikes paying taxes, you may not see much of a problem with it. But when government agencies suffer from lack of funding long enough, you realize how much the American public needs them to adequately do their jobs. The IRS is no different. Without enough staff, it has slashed even basic functions. It has drastically pulled back from pursuing people who don’t bother filing their tax returns. Since 2011, new “non-filer” investigations dropped from 2.4 million to 362,000 in 2017. Since tracking down these people and businesses down, determining what they owe, and reviewing what they submit in response can be time consuming. According to the IRS inspector general, this results in at least $3 million in lost revenue each year. Collections from people who do file but don’t pay have also plummeted. Since tax obligations expire after 10 years should the IRS not pursue them. Before the budget cuts began, such expirations were relatively infrequent. In 2010, only $482 million in expirations lapsed. In 2017, the number was $8.3 billion, which is 17 times as much. While the IRS’s ability to investigate criminals has been stymied as well. All in all, these IRS budget cuts have cost an estimate of $18 billion a year, but the true cost can run tens of billions more. So much that many current and former IRS employees fear that the United States could be on the verge of an era of brazen tax cheating from which it can’t recover. By any objective this is catastrophic of law enforcement that deprives an already cash-strapped government of hundreds of billions of dollars in revenue every year.
What’s worse is that the IRS faces a structural political problem. After all, it’s never been a popular agency since nobody likes paying taxes to support vital government services that benefit the American people. On one side are the anti-tax Republicans who are perfectly happy with passing tax-cuts for the rich and has been very anti-IRS since the 1990s. In fact, decades of Republican attacks and budget cuts have left the IRS a shell of its former self. On the other side are Democrats afraid of publicly supporting the taxman since nobody likes paying taxes. Not to mention, not all rich tax evaders are Republican donors either.
For rich people and corporations, it means less thorough audits on their assets should the IRS stop by and more leeway to send their money in an overseas tax shelter. After all, they’re the biggest beneficiaries of the IRS’s decay since it takes specialized well-trained personnel to audit a business or billionaire or to uncover a tax scheme. Those IRS employees are leaving in droves and are taking their expertise with them, often to the private sector. Auditing taxpayers with accounts in tax havens is difficult. Revenue agents have to investigate the cheating’s scope to and figure out whether it’s intentional. Tracking down necessary documents from foreign countries can add frustrating delays. Thus, the average time for an offshore audit is usually 3 years. For the country’s largest corporations, the danger of being hit with a billion-dollar tax bill has greatly diminished. Since the rich evade taxes the most simply because they have the resources to do so, the IRS has become less of a force to be feared. For studies have shown that audits have made people less likely to dodge taxes in the future. Take away the enforcement, evaders are emboldened and grow in number.
For the poor who receive the Earned Income Tax Credit, it may mean less audits. Yet, the audits are much more punishing. For someone living month-to-month, such exams can be devastating. That when ETIC recipients are audited, they’re less likely to claim the credit in the future. And because of a 2015 EITC law, EITC recipients are more likely to have their refund held. In 2017, ETIC recipients were audited at twice the rate of taxpayers making between $200,000 and $500,000 a year. Only those making more than $1 million were examined at significantly higher rates. In 2018, the IRS audited 381,000 ETIC recipients, which was among 36% of all audits the agency conducted that year, up from 33% in 2011 when the budget cuts began.
Now the Earned Income Tax Credit has had bipartisan support from both Democrats and Republicans alike since the 1970s. Conceived as a “work bonus” and welfare alternative, the program has grown over the subsequent decades. These days, the average credit is about $2,500 but the amount can exceed $6,000 for larger families. While the US Census Bureau has estimated that the EITC and the child tax credit together boost millions of children out of poverty every year more than any other government program. But unlike food stamps and Social Security, the EITC has no application process. Instead, taxpayers simply claim the credit on their tax returns. According to IRS estimates, millions of people get it wrong in both directions. Since about a fifth of US taxpayers don’t seek EITC while almost a quarter of the $74 billion paid out was “improperly” issued. And it’s that $17 billion estimate of “improper payments” is why the IRS focus on the EITC so much. However, some experts, including the IRS’s Tax Advocate Service, think this estimate is way too high. While one reason is it’s based on the outcome of audits. Since low-income taxpayers are much less likely to have competent representation to dispute the IRS’s conclusions.
Regardless of the precise error rate, the IRS acknowledges the problem’s primary cause isn’t fraud but the law itself. Since the law is too complex that it’s too easy for someone to think themselves eligible for EITC when they’re not. For instance, the same child might be a “dependent” but not a qualifying child under the EITC. While the IRS’s instructions to claiming credit run to 41 pages. As Washington and Lee law professor Michelle Lyon Drumbl told ProPublica, “My third-year law students, they sit down and study this material, and sometimes they still don’t get it.” And if third-year law students can’t determine who qualifies for EITC, then we shouldn’t hold low-income taxpayers’ improper claims against them.
In addition, since the 1990s, congressional Republicans have focused on these major problems and harshly criticized the IRS for failing to stop them. Despite that their rich donors’ overseas tax shelters pose a much larger problem than improper IRS refund payments to poor people. In 2015 congressional Republicans passed and President Barack Obama signed a bill requiring the IRS to hold EITC refunds until February 15 each year. The law’s purpose was to give the IRS more time to match tax returns with the corresponding W-2s to avoid misstatements of income. But it also meant that people to be audited are more likely to see their refund held instead of receiving the credit then undergoing the audit. For low-income taxpayers, that’s a crucial difference.
Furthermore, the IRS has a difficult task in auditing taxpayers claiming EITC because low-income families are often complicated. They’re more likely to be more multi-generational than more affluent filers as well as more likely to add or subtract household members from year to year. According to a study by the nonpartisan Tax Policy Center, only about 48% of low-income households with children were married couples, while it was 75% for other households.
IRS computers choose who to audit. Should those taxpayers respond, someone must review the documents. According to attorneys from the Low Income Taxpayer Clinic program, fewer employees to do that result in delays mounting in an already arduous process. Thus, it regularly takes more than a year to release a taxpayer’s refund, even if they have representation. As Texas RioGrande Legal Aid attorney Mandi Matlock told Pro Publica, “If the service doesn’t have the personnel to evaluate evidence submitted in a timely manner, then they should not be initiating the exams in the first place.” The IRS makes the situation needlessly worse by conducting virtually all EITC audits by correspondence, which are automated as with most Americans’ interaction with the IRS. And the computer-generated letters are far from simple that a survey by the Taxpayer Advocate Service found that more than a quarter of audited EITC recipients didn’t understand why the IRS put them under a microscope.
Generally, in regards to taxes, we generally accept the notion that the more money you make, the more likely you’ll get audited. EITC recipients who normally make less than $20,000 a year have long been the major exception and are already under more scrutiny compared to other taxpayers. Why? Many people claim the credit in error. And due to consistent pressure by congressional Republicans, the IRS has kept the audit rates higher. Because God forbid that poor people shouldn’t be carefully scrutinized any time they receive help staying alive. This is how you get the EITC audits along with drug tests and work requirements for food stamps and Medicaid just to make the poor ashamed of their poverty that’s out of their control. At the same time, there hasn’t been similar pressure to address more costly problem areas like tax evasion by business owners and rich people. Despite that they’re more likely to evade taxes and the IRS receives more revenue from auditing them. Besides, even if they owe money, rich people are way less likely to experience any financial hardship. Yet, as far as the GOP is concerned, rich people and corporations should do whatever they want like dodge taxes, engage in insider trading, and take advantage of ordinary workers.
Budget cuts and staff losses make this distortion starker. Despite that the richest taxpayers get audited at higher rates than the poorest, the gap’s been closing. Former deputy IRS Commissioner John Darlrymple told ProPublica “What happens is you have people at the very top being prioritized and people at the very bottom being prioritized, and everyone else is sort of squeezed out.” In other words, as the IRS has shrunk in size and capability, audits of the poor have accounted for more of what it does. Oregon US Senator Ron Wyden told ProPublica, “Those struggling to make ends meet are being unfairly audited while the fortunate few dodge taxes without consequence. The IRS needs more manpower to go after tax cheats of all sizes, and working Americans need a simpler way of obtaining a tax credit they’ve earned.” Thus, the more the IRS focuses on auditing poor tax cheats who are trying to get by, the rich ones are increasingly more able to dodge their taxes without consequence. It’s kind of like how a business executive who steals millions of dollars in insider trading get a short jail sentence at a minimum security facility while the desperately poor kid gets at least 5 years in prison for armed robbery at a convenience store. Sure, neither are right to do what they did, but the rich guy’s crimes inflict far more damage to society than the convenience store robber ever could. While the convenience store robber receives a disproportionately harsh sentence.
Taxpayers of all kinds cheat since cheating is part of human nature. While no social class has a monopoly on moral values. Yet, despite the scrutiny, IRS studies found that EITC recipients aren’t the worst offenders. For instance, in regards for certain kinds of business income, people pay only 37% of what they owe because they simply don’t report the income. As a result, hundreds of billions in government revenue is lost, which is way more than even the highest improper EITC payment estimates. But people owning business are audited by the IRS at the same rate as EITC recipients. National taxpayer advocate Nina Olson told ProPublica that the IRS disproportionate focus on stopping “improper payments” to EITC recipients is misguided. She asked, “What’s the difference between an erroneous EITC dollar being sent out and a dollar attributed to unreported self-employment income not collected?” Since she noted that unreported business income is “where the real money is.”
When EITC cheating does occur, tax preparers are usually the culprits. According to the National Consumer Law Center’s Chi Chi Wu, “They know the system, they game the system and ultimately the taxpayer ends up on the hook if there’s an audit.” While undercover NCLC and Government Accountability Office investigations found multiple preparers advising taxpayers to file bogus EITC claims. Using a tax preparer to figure out your taxes isn’t unusual in the US since 60% of American taxpayers use one. But commercial tax preparers have a dubious reputation as a predatory industry targeting the poor. And when EITC recipients are audited in the future, they’re less likely to claim credit in the future. But most states don’t require tax preparers to be licensed and the IRS has limited ability to oversee them. In fact, after launching a program certifying preparers and subjecting them to regular compliance checks, a federal appeals court ruled in 2014 that the IRS doesn’t have that power. Congress could pass a bill to confer that authority to the agency and should. But despite some bipartisan support for the idea, it hasn’t.
In any case, as soon as Donald Trump and his cronies lose the vestiges of political power, we must reform the tax system. While most Americans see tax evasion as illegal and morally wrong, the wealthy and powerful abide by a different set of rules than the rest of us. Not only does the tax system enable the wealthy to take advantage of tax loopholes, it also lets them to blur the line between legal tax avoidance and illegal tax evasion with little consequence. We must reform the tax system to close the loopholes rich people use to dodge taxes and substantially increase funding to the IRS to ensure that the laws we do enact are strongly enforced.