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Comment by thesausageking | Hacker News Reader

It used to work that way but the IRS no longer prioritizes the highest earners because they can't afford to. They've been underfunded for years and auditing high earners is very expensive and often involves long legal battles which they don't have the resources to fight.

Audit rates of people making $1m or more are down by 80% since 2011. Now "the top 1% of taxpayers by income were audited at a rate of 1.56%. EITC recipients, who typically have annual income under $20,000, were audited at 1.41%."

Source: https://www.propublica.org/article/irs-now-audits-poor-ameri...

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There is an aspect of seeming illogic I want to call out here. Maybe it's just my lack of understanding.

Assuming the IRS is underfunded, saying they focus on low income people as a consequence, when it would be more lucrative to target high earners, makes no sense. The claims could all be true, but they don't appear to be connected.

Why would the total amount of funding force the IRS to spend less on individual cases? An alternative hypothesis might be that it actually is more cost effective to target people with less money, for instance, people paid mainly in cash tips, but I don't have any idea if that is plausible, I'm just saying the narrative doesn't make sense to me.

In general, targeting rich people seems obvious because rich people "have the money", but mathematically, it depends on how many there are when you multiply it out.

Anyway, I am very open to the idea that the IRS is being stupid and counterproductive, or politically avoiding prosecuting the rich, but I think it raises the question of "why" that is not answered by saying "underfunding". They still have funding to go after one or more high earners, right, so the total amount is irrelevant if it's taken as a given.

Maybe IRS just knows that they're being underfunded precisely to stop them from auditing Congress's rich sponsors, so they proactively self-censor their audits to prevent further cuts?

Pretty much this.

I don’t understand how Republicans can argue cutting funding to the IRS will save the government’s spending. Instead their goal is to make the tax base richer by cutting taxes of the rich. Many of them are all about cutting taxes to the rich and corporations, doubling down on the trickle down. They even blocked payroll tax cuts to the lower and middle class:

http://www.washingtonpost.com/politics/house-republicans-def...

Wealthy people have the resources to defend themselves in court. If you live paycheck to paycheck, you generally cannot afford lawyer fees, taking time off work for court appearances, or the risk of actually losing a case, or the probably million other things I'm not thinking about right now. It is almost always easier to go after the poor than it is to go after the rich and powerful.

The article linked in the parent comment explains it. Audits of lower income people are largely automated - a letter is generated and sent in the mail. Auditing higher income people takes paid investigators, lawyers and time. They are both considered "audits", but its not the same procedure.

By this logic, they should be focusing on higher income people if audits of lower income people are automated and therefore require drastically less manpower.

The cost of sending the letters is a lot less than bringing a lawyer into court. Low income individuals just pay up. If it costs pennies to send and you make $100, you’re going to keep optimizing that. If you lack the funding to take down a hedge fund manager, you’re not going to bother trying.

The IRS also sends the letters to people that they owe money. This year my accountant didn’t realize I was owed a credit. The IRS mailed me a check and a letter explaining why they adjusted my return and issued the credit.

Systemically, threatening letters, while practically free for the government to send - cause a lot of stress for people. Both those who owe tax and those who have to prove they don't.

It's hard to know where to draw the line but you could reasonably argue that chasing low income people for small amounts is net negative societal utility, even when you get them to pay up.

Humans are notoriously good at ignoring externalities when they're not held to account for them.

No wonder there is an increasing income inequality of the middle-class and below when they can't catch a break while the rich are mostly left unimpeded with tax evasion.

I completely agree. I was pretty terrified until I opened the letter and saw a check. I assumed it was an audit.

The thing that is often ignored, unknown, or forgotten, is that it doesn’t have to work this way. Some countries send you an end of year report on how much they collected from you and you can audit them as well. It’s less laborious than our system. I am blissfully unaware of the complications of such a system but I’d like to think that it works better. I’d like to think the people of the IRS would prefer that too.

I hate to get any sort of "thin" envelope from the IRS..

The problem with this approach is that if you actually have income they don't see they've basically told you they don't know about it and aren't likely to catch you if you don't tell them.

Audits of the rich are not economical for the IRS. Audits of the poor are extremely cost efficient, because they can be automated, and because they don't fight back.

It's because the costs for going after well-funded and well-defended tax cheats is higher than going after middle and lower income people who can't defend themselves. This has been known since George Bush II's tenure.

The IRS selects which returns to audit based in part on a statistical formula that identifies returns most likely to be at risk of having an error

So yes, you're correct. Analyzing whether or not someone is eligible for EITC (those making less than ~$50,000) can be automated and if flagged, a letter sent telling them they aren't eligible or asking for more information.

[1]https://www.taxpolicycenter.org/briefing-book/how-do-irs-aud...

I also read an article on this a while ago that said that at least informally, the metrics changed in the IRS - the practice went from evaluating auditors based on the dollar value they recovered to evaluating auditors based on the number of files they opened and closed. So of course now the auditors focus on the small cases because they're quick and easy, and they don't want to have to explain to a performance management system why they closed fewer cases than their coworkers.

'Cost effectiveness' doesn't help them since they don't get to use the money they collect in their own budget.

They can't choose to spend more, knowing they will make it back.... they don't have the money to invest in going after rich tax payers. They can only spend the budget they are given, and that isn't enough to go after rich people, even if it would bring more money in.

Does anyone have a citation for this?

I expected this was a big reason for the seemingly illogical behavior, but am curious how it shakes out. Where does money they recover go?

It would seem to make sense to seed a high income investigative unit, checked by the courts, and then allow them to retain a substantial portion of their recoveries to self-fund.

> https://www.irs.gov/pub/irs-pdf/f1040v.pdf

"Make your check or money order payable to “United States Treasury.” "

That's, you know, the federal government. Not the department called the IRS. The IRS gets a budgeted amount of funds.

IRS is funded out of the general fund by Congress, which is also where the money the IRS finds goes.

> It would seem to make sense to seed a high income investigative unit, checked by the courts, and then allow them to retain a substantial portion of their recoveries to self-fund.

For an example of how this could go horribly, horribly wrong, look at police use of civil forfeiture. https://www.nbcnews.com/think/opinion/police-abused-civil-fo...

>> checked by the courts

If you limited their targets to high net worth individuals, I daresay they'd be able to afford a robust (and as fair as we can make it) defense.

Unlike the abuses in civil forfeiture, where the primary targets tend to be without legal recourse.

Limiting scope sounds nice in theory but there is always scope creep when you throw greed into the equation. And generally speaking the courts are not designed to be a fast resolution to anything.

That's why you build a system of adversarial justice: enforcement vs defense. Same as we feel is good enough to use elsewhere.

And a fast resolution doesn't seem required in this case. High net worth individuals don't seem like they'd be impacted by {potential tax bill and penalties} of their assets being frozen for multiple years while a case plays out. Relative to their total assets, any tax bill is going to be manageable.

The only problems actually preventing the IRS from conducting this enforcement are (1) political cover from direct Congressional interference & (2) lack of resources due to general defunding by Congress.

Given a choice between the dangers of establishing a self-funding high net worth tax prosecution arm and not prosecuting those individuals, I feel the greater risk to democracy is the later.

Maybe we just need a new agency. One that targets rich people that us plebs can support and politicians can promote. And then just keep the IRS how it is going after plebs for us to hate.

Seems like institutional failure if I have to vote for IRS expansion, the same people going after my tiny coffer, for the IRS to go after anyone else. That's a dumb conflict of forces.

Or just start over. Dunno why my dollars that I had to go to work for and do what someone else told me to do is guiltier and more traceable than anything else.

> That's a dumb conflict of forces.

That's deft political engineering. Congress is to blame. They tweak the budget to protect themselves and their true constituents (megadonors and lobbyists).

We're in a peculiar situation where democrats and republicans are both on the "right" in their fiscal policies. Any blush of "left" policy is shouted down by bipartisan echoes of McCarthyism. The politicians of both parties are, by and large, upper class, and they collectively pit the middle class against the lower class.

We don't need a new IRS, we need a new breed of politician. And enough funding for the IRS that it can audit those politicians and their donors fearlessly.

Off-topic, but it strikes me as interesting how everyone always considers themselves "the masses", calling themselves "us plebes" on a forum where a six-figure salary is the norm.

Low six figure salaries are barely middle class in many cities the US.

The kinds of rich people being discussed in this thread are still a very small percentage of six-figure+ earners. I would venture to say (no pun intended) that most HN readers are not accredited investors.

Sure, but "middle class" doesn't really mean much, the median income in the US is $61k.

I'm a little thick. What are you implying here?

I mean that "middle class" doesn't mean you're in the median.

Is that per capita, per household or by tax return?

I believe the median salary in Loudoun County, VA, which is the richest county in the US or close, is around $70K. The lower boundary of "middle class" must be lower, then.

So I continue to think that the six-figure norm people talk about is within a "reality distortion field".

Median incomes in metro areas all over the US often exceed 120k, meaning one half of people earn more than that.

Not sure if that’s right. Median income for SF is 74k, for instance.

Is that income or salary?

If you need to work in order to keep a roof over your head, food on your plate and to take your kid to a doctor, then you are working class. It doesn't matter how much money you make, because it is never enough to leave the working class and live off of your assets indefinitely.

I suspect this forum has an (relatively) high ratio of people who can and do manage to do exactly that.

While I agree with your reasoning, I think the generally accepted understanding of "working class" is of skilled and unskilled laborers that are distinct from the "professional class" that tend to work in offices and don't work so much with their hands. A plumber running a small business employing other plumbers with a massive cash assets could be a lot farther from being homeless than a senior lawyer with multiple houses and expensive cars but the plumber will always be perceived as "working class" in contrast to the lawyer's "professional class".

Social class defined by economic relations has material consequences that exist between countries and cultures, and the colloquial usage you're referring to[1] is dependent on where you are and who you ask.

To sociologists, economists, and academia, those who rely on a salary or wage to live are considered working class compared to those who don't.

[1] https://en.wikipedia.org/wiki/Working_class#Definitions

No. If that were the case, then some banker in NYC, making $1M a year, but no savings, living in a $2M condo with a $10,000 monthly mortgage and 3 kids in private school would be "working class".

That's a perversion of the definition.

And a 65 year old alabamian plumber living off his meager trade union pension would be upper class.

You might find Me Money Mustache [0] interesting.

[0] https://www.mrmoneymustache.com/blog/

That's not true. With a six figure income, you can live like people making half what you do, save the other half of your income and retire early to live off your assets indefinitely. That's harder to do the lower your income gets.

This visualization is pretty eye opening in illustrating the difference between a cushy six-figure job and the ultra-wealthy that we're talking about as the complement of "us plebs"

https://mkorostoff.github.io/1-pixel-wealth/

There are only 500-600 billionaires in the US and I'd wager that none or very very few of them cheat on their taxes, given that doing so would have provide essentially no noticable improvement on their spending ability, but have a very high cost if caught.

I don't think your handsome graphic there is offering much insight into the topic at hand. The richer someone is, the less likely they are to cheat on their taxes.

Yes and no.

EITC not withstanding you need to have income to hide it.

According to Brookings, the bottom 50% pay 14% of the taxes but are responsible for only 12% of evasion.

The better distinction is the source of income. Farms, landlords and sole proprietorships are the leaders in misreporting income. W-2 salary reporters account for <1% of evasion. Between those two groups are misreported tips (typically lower end) and capital gains (typically higher end)

Please stop comparing wealth and income.

Your salary is not what makes you working class or bourgeoisie. The distinction is, broadly, whether you must sell your labor to survive.

So a FAANG employee pulling in $600k a year is "working class"?

Hell no. If you're in the top 1% of income (~$400k per year) you are wealthy.

While they definitely are not “blue collar”, income is not wealth. It is a mistake to conflate income and wealth, the implications are very different. One can have a high income today and be destitute tomorrow absent wealth. Wealthy people are a subset of those with high incomes.

Your definition doesn't really align with how "wealthy" is used.

If you're making $400k per year, how long before you start to accumulate substantial wealth? Pretty quickly I'd say. Sure it might not be millions, but if you sock away $200k at age 25 after 3 years, you have more wealth than 99% of people your age.

"Wealthy" is not limited to wealth alone. If you're making $2M a year and have no savings, you're still "wealthy".

And people with large amount of wealth (your definition) can still become destitute. There are plenty of examples.

Starter homes in San Francisco start at $1M.

That $400k post tax is mostly going into housing.

Yeah, but owning a single family home in one of the most desirable cities in the US makes you rich. That’s something 90% of America couldn’t dream of doing.

Being able to own a starter home outright within 3 years or so sounds pretty sweet to me. Many people need decades to pay off their mortgage.

"Working class" in the sense of political economy, not Western shorthand for "blue collar".

And yes, I believe that if you sell your labor for a living, whether it be for $400k at Apple or otherwise, you have more in common with someone making $24k bussing tables than you do with the person who owns property for a living.

I think "survive" has a really wide range of definitions. Most Americans live paycheck to paycheck, both the $1m+ per year NYC bankers and the $50k per year midwest mailman.

Both could survive on far less.

Yes, the middle class has the luxury to not be bothered with immediate survival. A food on their plate and a roof over their heads. A time to think.

Some might say that with that luxury comes the responsibility to improve the situation.

Maybe the problem is that they are a s*ty agency that randomly fines people and expect them to pay up. I don't have knowledge how the IRS works but I know at least one tax agency in this world that would fine you random amounts and just wait for your reaction. They are not in the business of fairly auditing your numbers because they'll lose, so they turn to poorer persons that they can bully.

Another thing, many countries expect rich people and rich companies to hire government-certified accountants to verify your fillings (known as a Statutory auditor https://en.wikipedia.org/wiki/Statutory_auditor ). This makes it harder for these companies to do stuff the non-audited guy can easily do.

This is infuriating, and is basically an admission that the rich are allowed to evade taxes.

Its called Capitalism. Its always been the case in capitalist society that only poor people pay tax, thats why half the world had revolutions to kick it out.

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