“IRS More Likely To Audit the Poor and Not the Rich,” read the headline over a New York Times lead article on April 16. Makes your blood boil, don’t it? At a time when the rich are richer then ever, here are jack-booted IRS agents trolling through low-income areas, kicking in the doors of hovels and demanding that frightened residents produce documentation for the Passive Activity Loss claims on their Form 8582s.
The statistics presented in the leading graphs of the front-page article were certainly unsettling. “Last year, for the first time, the poor were more likely than the rich to have their tax returns audited, new Internal Revenue Service data compiled by Syracuse University researchers shows. The IRS audited 1.36 percent of all tax returns filed by people making less than $25,000 last year, compared with 1.15 percent of returns filed by those making $100,000 or more.” Meanwhile, the chances that corporations and self-employed business people (a normally fertile ground for tax evasion) will get raided by the revenooers have also dropped precipitously.
But the main reason the IRS has curtailed audits of rich folk and corporations is that its staff has been cut by 31 percent since 1998. Also, Congress ordered it to spend more quality time answering the questions of taxpayers understandably confused by a tax code made more complex by that same Congress.
As for the blistering scrutiny on low-income folks, that, too, was a mandate from Congress, concerned about the very high error rates recorded by such filers in claiming Earned Income Tax Credit payments. The EITC, which has greatly increased the progressivity of the federal income tax, pays cash to families whose earnings are below the level at which the income tax cuts in. It also offsets part or all of the liability owed by families considerably higher in the income scale. This year, more than a third of filers will pay no tax or get an IRS bonus. But audits reveal that 20 percent or more of the $30 billion distributed by EITC this year will go to people not entitled to it. (Shady tax advisers in low-income neighborhoods routinely advise clients on ways to game the EITC. For instance, scammers fraudulently report income just at the level where the EITC peaks in value; some married parents falsely claim that they have separated and split the kids between them or claim more kids than really exist.)
Instead of getting the time-intensive, face-to-face audit that higher-income filers are subjected to, low-income families typically face a “letter exam,” asking for documentation of their claims. Even so, these quickie audits are surprisingly fruitful–the typical one saved the Treasury $2,171 in 1999.
To be fair, many of these facts were recorded deeper in the Times article. But who read past the jump? Certainly not many TV anchors, who made hay out of the story.
It may be no surprise that the headline selected by the Dow Jones news service put the accent on a different syllable: “Analysis Shows EITC Compliance, IRS Staffing Problems.” But the contrast with the Washington Post, that supposed bastion of knee-jerk liberalism, is even sharper. “A Kinder IRS Raises New Worries as Audits Plummet,” topped its story, which waited until the fourth paragraph to mention the higher rate of low-income audits–and noted in the same sentence that it was caused by a congressionally mandated crackdown on EITC fraud.
The harm in the Times’ faux-populist concern for the oppressed masses is this: The federal income tax is the most progressive tax in our system. Sure, the tax code should be far simpler–and it could be if Congress and the president (who, an aide once told me, never met a tax credit he didn’t like) stopped glopping it up with spending programs disguised as tax breaks. But unfairly criticizing the IRS only provides ammo to those self-professed friends of the common man who would convince him he would be far better off with a (highly regressive) national sales tax or the like. Nor does complaining about a crackdown on EITC fraud serve the interests of those truly concerned about the needy. President Clinton wants to expand the EITC by some $21 billion over the next decade, and politicians from both parties have endorsed its prior enlargements. But if fraud rates remain as high as they have been (and 20 percent is a considerable improvement over rates recorded in the early ‘90s), it will be increasingly difficult to make the case for converting the IRS into the nation’s largest welfare office.