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IRS Audits Poor Taxpayers At Same Rate As Richest One Percent

Every year, the IRS, starved of funds after years of budget cuts, loses hundreds more agents to retirement. And every year, the news gets better for the rich — especially those prone to go bold on their taxes. According to data released by the IRS last week, millionaires in 2018 were about 80 percent less likely to be audited than they were in 2011.

But poor taxpayers continue to bear the brunt of the IRS’ remaining force. As we reported last year, Americans who receive the earned income tax credit, one of the country’s largest anti-poverty programs, are audited at a higher rate than all but the richest taxpayers. The new data shows that the trend has only grown stronger.

Audits of the rich continue to plunge while those of the poor hold steady, and the two audit rates are converging. Last year, the top one percent of taxpayers by income were audited at a rate of 1.56 percent. EITC recipients, who typically have annual income under $20,000, were audited at 1.41 percent.

Part of the reason is ease. Audits of EITC recipients are largely automated and far less complicated.

“While the wealthy now have an open invitation to cheat, low-income taxpayers are receiving heightened scrutiny because they can be audited far more easily. All it takes is a letter instead of a team of investigators and lawyers,” said Sen. Ron Wyden, D-Ore., the ranking member of the Senate Finance Committee.

“We have two tax systems in this country,” he said, “and nothing illustrates that better than the IRS ignoring wealthy tax cheats while penalizing low-income workers over small mistakes.”

In a statement, IRS spokesman Dean Patterson acknowledged that the sharp decline in audits of the wealthy is due to the agency having lost so many skilled auditors. And he didn’t dispute that pursuing the poor is just easier.

Because EITC audits are largely conducted through the mail by lower-level employees from a central location, they are “less burdensome for taxpayers than in-person audits as they mail in their documentation and don’t have to take time out of the workday,” Patterson said.

“Correspondence audits are also the most efficient use of IRS’ limited examination resources.”

In April, Wyden, citing ProPublica’s reporting, asked IRS Commissioner Charles Rettig to deliver a plan to address the agency’s disproportionate focus on auditing the poor. The deadline has passed, but Wyden’s office said the senator still expects a response. The IRS did not comment on the delay.

The agency audited 382,000 recipients of the EITC in 2018, accounting for 43 percent of all audits of individuals last year. When we mapped the estimated audit rates for every county in America, the counties with the highest audit rates were poor, rural, mostly African American and in the South, a reflection of the high number of EITC claims there.

Natassia Smick and her husband were among those unlucky 382,000 households. We wrote about them last year. They live outside Los Angeles and saw their entire refund frozen in February 2018. For a couple who earned about $33,000 in 2017, that $7,300 refund was big money ($2,000 of it stemmed from the EITC). When it didn’t come, Smick said she had to abandon plans for catching up with her credit card debt.

After Smick sent in all her supporting documents, it took until this May to get a final answer from the IRS. Fourteen months after it all started, the IRS said it agreed Smick and her husband were due about $7,000, she said. But the agency disagreed on the remaining $350, because it couldn’t verify her husband’s employment for part of the year. Smick said the IRS was wrong to hold back the $350, but she couldn’t afford to contest it and further delay the $7,000.

“I’m not going to fight anymore,” she said. “We have already waited too long, and we are not in a financial position to wait another three months to appeal.”

A new study by academic and government researchers shows that there has been a big cost to these audits: They’ve discouraged hundreds of thousands of families who might qualify for the credit from claiming it in future years.

For poor taxpayers, the worst part of the EITC audits is usually the beginning. That’s because they almost always begin with the shock of the refund being held.

But the audits also hardly ever end well. According to data in the new study, most end without the taxpayer responding at all, and the poorer the audit target, the more likely that is to happen. Those with wage income under $10,000 per year, for instance, didn’t respond at all in 64 percent of the EITC audits. For those with income over $40,000 per year, that rate dipped to 35 percent.

The diminished response rate of the poorest taxpayers in part reflects that they are harder to reach: In 15 percent of those audits, the mail couldn’t be delivered. But earlier studies have also shown that many poor taxpayers don’t understand they are being audited or have trouble deciphering what the IRS is asking in its letters.

The EITC is aimed mainly at low-income workers with children. Last year, 26 million households received an average credit of about $2,500. Most EITC audits require taxpayers to dig up documents to show that a child meets the legal threshold of a “qualifying child,” a status that’s distinct from a dependent. The IRS has long blamed the law’s complexity as the main reason taxpayers may incorrectly claim the credit.

Smick was among the rare audit veterans who prevailed. Taxpayers rarely win against the IRS regardless of how likely they are to qualify for the credit, according to the new study, which was done by Day Manoli, an assistant professor of economics at the University of Texas at Austin, and researchers with the IRS and Treasury Department.

The authors sliced the population of EITC recipients into categories. At one end of the spectrum were tax returns with red flags that made it almost certain they would be audited. On the other end were returns very unlikely to be audited. But, looking over time, the outcomes of those audits weren’t all that different. When those returns with red flags were audited, the taxpayers prevailed seven percent of the time. The taxpayers at the other end of the spectrum — the group seemingly most likely to qualify for the credit — only prevailed 10% of the time.

The audits have a long-term impact on the lives of those who go through them, the study found. In the years after they were audited, wage earners were 68 percent less likely to claim the credit compared with similar taxpayers who had not been audited. They were even 14 percent less likely to file taxes at all.

These taxpayers surrender “benefits from potentially legitimate EITC claims,” the study authors write, and, when they fail to file taxes at all, leave money on the table in the form of other credits and withholdings.

Because the IRS conducts so many EITC audits — between 380,000 and 600,000 per year over the past decade — at the very least, hundreds of thousands of taxpayers have likely avoided claiming the credit in response to having it denied through an audit. By discouraging people from claiming the credit, the audits clash with an avowed goal of the IRS: to encourage people to claim it. About a fifth of those eligible for the credit don’t claim it, and the IRS runs education campaigns to increase uptake.

EITC recipients are audited at such a high rate in part because Republicans in Congress have long pressured the IRS to reduce incorrect payments of the credit.

The IRS estimates that there was about $18 billion in incorrect claims in 2018. In most contexts, $18 billion is a big number, but when compared with the full scope of unpaid taxes, which likely total more than $600 billion each year, it’s not so big.

And while that $18 billion number, which Republicans touted as a “big problem” in the April hearing, is often cast as a kind of government waste, the study shows things are far more complicated.

In the years following an audit, the study found, children who were claimed on one taxpayer’s return often were claimed on a different taxpayer’s return. In other words, the kids might have just been claimed on the wrong return, and if that’s the case, the money should have been paid out, just to someone else.

The authors distinguish between the $18 billion in “gross overpayments” of the credit, which would include such misdirected payments, and what they call “net overpayments,” money that shouldn’t have been paid out at all. The “net” number, they say, could be one-third to one-half smaller than the “gross” one.

The IRS, in its statement, said the study had focused on a sample of only one type of taxpayer (single and head-of-household filers), and so the estimate of “net overpayments” should not be generalized to the entire EITC-claiming population.

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

IMAGE: U.S. Senator Ron Wyden (D-OR) speaks with reporters as he arrives for the weekly Democratic Caucus policy luncheon at the U.S. Capitol in Washington. REUTERS/Jonathan Ernst

Lawmakers Confront IRS Over Tax Audits That Target The Poor

Over the past six months, ProPublica has detailed the myriad ways the IRS has been gutted and how that has impacted its ability to do its job. In sum: The wealthy escape scrutiny while the working poor, an easier target, are audited at high rates.

This week, Congress, in two separate hearings, confronted IRS Commissioner Charles Rettig with the findings.

“How can the Congress stand by a tax-enforcement system that punishes working people and gives the wealthy a green light to cheat?” asked Sen. Ron Wyden, D-Ore., ranking member of the Senate Finance Committee, during his opening statement on Wednesday.

Wyden was referring to a ProPublica investigation last week into the fate of the elite unit the IRS formed to keep up with the complicated tax-avoidance schemes of the wealthy. Faced with staff cuts and blowback from the wealthy and their tax representatives, the effort fumbled and was scaled way back.

Wyden demanded that Rettig produce a plan within 30 days on how his agency will change a system that is “stacked in favor of the wealthy” and “against the most vulnerable.” Rettig promised to do so.

One day earlier, at a hearing before the House Appropriations Committee, Rettig was also questioned about a map showing where in the country IRS audits are most concentrated. The top five most audited counties, ProPublica found, were rural, mostly African American ones in the Deep South. (On Wednesday, Wyden called the map “shameful.”)

Rep. Charlie Crist, D-Fla., displayed the map during the hearing and asked: “The map looks like the IRS is targeting black, Hispanic and Native American populations for audit. Is that the case?”

Rettig said that it wasn’t, adding that the IRS did not screen for race when selecting returns for audit.

But Crist said the findings amounted to “disparate impact,” the idea that even if unintentional, systems can produce “racial discrimination in practice.” He asked how the IRS would avoid “implicit or explicit” bias going forward.

Rettig didn’t have a clear answer. The IRS audited such a large number of low-income families because they claimed the earned income tax credit, he said. The EITC is one of the country’s largest anti-poverty programs. But the IRS estimates that of the more than $70 billion paid out last year through the program, $18 billion was claimed improperly, Rettig said. This made the program a priority for the IRS to audit, he said. As previous IRS commissioners have done, he blamed the complexity of the law as the main cause of those incorrect claims.

While that $18 billion figure sounds impressive, experts within and outside the IRS have argued that the agency’s estimate is far too high, largely because low-income taxpayers are much less likely to have competent representation to dispute the IRS’ conclusions.

The $18 billion is also just a pittance when compared with the vast universe of unpaid taxes. The IRS produces an estimate of what it calls the “tax gap,” which is how much tax is actually paid compared with what should have been paid. It’s been a few years since the last estimate, but assuming the rate of compliance has not changed (if anything, it’s gotten worse), the tax gap in 2018 would have been between $600 billion and $700 billion. At most, incorrect EITC payments account for around three percent of that.

By comparison, in 2017, the last year for which data is available, audits of EITC recipients accounted for 36 percent of all audits.

Since the 1990s, Republicans have put pressure on the IRS to address incorrect EITC payments, and Republican senators in Wednesday’s hearing continued that pressure.

“This is a big problem,” said Sen. Pat Toomey, of Pennsylvania, referring to improper EITC payments. “This is where the money is,” said Sen. Bill Cassidy, who represents one of the most heavily audited states, Louisiana.

Rettig expressed a willingness to work with Congress to address incorrect payments of the EITC, perhaps by simplifying the requirements. He notably did not suggest that the IRS might scale back the number of audits. As ProPublica reported last year, the IRS is understaffed, so people who are audited for claiming the credit and send in documents supporting their claim often must wait a year to find out if their proof is accepted.

When it comes to auditing the wealthy, Rettig did say that one of his “focal points” was “to get the audit rates up for the more wealthy taxpayers.”

“I’m an enforcement person,” he assured lawmakers on Tuesday after they expressed concern about how far the audit rate has fallen. “I’m an enforcement-minded person. … Personally, I have both eyes focused on enforcement.”

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

Citing Pro Publica Stories, Senators Urge IRS To Pursue Big Tax Cheats

In a letter on Friday , a group of prominent senators — including Minority Whip Dick Durbin (D-IL), 2020 presidential candidates Elizabeth Warren (D-MA), and Bernie Sanders (I-VT) as well as Sheldon Whitehouse (D-RI), and Richard Blumenthal (D-CT) — urged IRS Commissioner Charles Rettig to increase the agency’s focus on large tax and financial crimes.

As ProPublica has documented with a series of articles, the IRS is a shadow of its former self, the result of a near-decadelong campaign by Republicans in Congress to starve the agency of funds. The agency’s enforcement staff has dropped by more than a third. That has been a boon to the rich and to tax cheats in particular, who have benefited from a collapse in audits, collections and criminal tax prosecutions.

As we reported, and as the senators noted in their letter, the story has been different for the poor, as the IRS has devoted a disproportionate number of its audits to taxpayers who receive the earned income tax credit, one of the government’s largest antipoverty programs.

The senators acknowledged that the budget cuts have badly weakened the agency, but they argued that ProPublica’s stories, together with government watchdog reports, show the IRS could use its limited resources more effectively.

The widening circle of investigations surrounding President Donald Trump has highlighted the weakness of tax enforcement, as we explained last October. Paul Manafort hid income overseas for years, and Michael Cohen dodged taxes through the simplest means imaginable (by lying to his accountant and the IRS) without consequence. It was only after the Robert Mueller’s team and other federal prosecutors began scrutinizing Trump’s circle that their crimes were discovered. The senators say that such examples of “exposure of criminal activity only resulting from investigations pursued for other matters” prove that the IRS can do more. “We urge you to strengthen enforcement efforts at the IRS, including focusing on tax code violations and financial crimes that may be linked to money laundering,” they wrote.

The IRS will not get a budget increase anytime soon. After a 34-day government shutdown, Congress and Trump struck a deal to fund the government for the next seven months. For the IRS, the deal included a cut from last year’s budget. In real terms, the enforcement portion of the agency’s budget is down by 23 percent since 2010.

Will things change next year? That’s in part up to Rettig. Last year, Republican congressional staffers told us that lawmakers might respond favorably if Rettig asked for more funds. So far, Rettig has not made any clear statements about whether he believes the IRS needs more money to do its job.

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

IMAGE: IRS Commissioner Charles Rettig (right) with Senate Finance Committee chairman Orrin Hatch (R-UT).