They ignore much larger sums. The real reason they’re targeted is that, quite simply, they’re unable to fight back. It’s the equivalent of searching for your keys under the streetlight.
Not really [1]. When you make more than $500k, your audit rate doubles from the national average of 0.25%. It doubles again at $1mm and more than doubles once more at $5mm.
EITC-only returns are audited around the frequency (0.77%) of someone making $500k to $1mm. I'm not sure why $1 to 25k is audited at the same frequency as $500k to $1mm. But given "from fiscal years 2010 to 2021, the majority of the additional taxes IRS recommended from audits came from taxpayers with incomes below $200,000" and that "EITC audits are primarily pre-refund audits and are conducted through correspondence," it seems--very roughly--closer to the optimum than the headline suggests.
Correcting a simple error might never even involve a human IRS auditor. It's as simple as an automated letter going out and instructing someone to correct an obvious mistake (this happened to me).
Never spoke to anyone - just submitted the correction. There should be no limit to audits that are nearly-automated, regardless of whom they target.
Audits that require an investigator are far more effort and those investigative resources need to be proportioned by the expected return on investment. ...and while that will likely tend more frequently to the rich, it shouldn't necessarily be so.
This is what a typical audit of EITC looks like. It is literally "send us some forms and some proof like a birth certificate showing you're the parent of the child you're claiming".
> A critical limitation in the IRS’s ability to audit millionaires is the availability of IRS revenue agents. Only this class of auditors, given sufficient training and experience, are qualified to examine complex tax returns – the types of returns typically filed by high-income individuals and large-scale businesses.
> With severe budget constraints, IRS has tended to trade off the replacement of revenue agents with hiring more tax examiners. These certainly are paid less, but they are also less knowledgeable. While revenue agents used to outnumber tax examiners, this has slowly shifted over time.
https://www.finance.senate.gov/ranking-members-news/irs-budg...
> IRS Research Division estimates in the 2003 GAO report, however, placed returns for activities such as tax enforcement at more than ten – and in some cases more than 20 – dollars collected for every dollar spent. Phone calls to follow up on tax debts owed were estimated to return 13 dollars for every dollar spent. Audits by mail returned as much as 11 dollars for every dollar spent. Using the overall rate of a four to one return, this year’s $100 million budget cut translates to a $400 million loss.
Imagine 20 dollars per dollar spent, that's the type of unicorn investment that basically every VC hunts for.
It's frustrating that every business person who has ever lived would absolutely throw money at that formula if it was part of their business, but that's not politically popular because the IRS costs money to operate.
Mathemarically it makes sense to go until you hit 1:1. If we increased enforcement until, say, 4 dollars collected for every 1 spent in each of the major categories, the deterrent factor would probably help people be more honest in times of dishonesty, naturally helping the problem for the following year.
Maybe mathematically. But realize that the targets of the audits are probably bearing at least as much of the cost burden of the audit as the IRS whether they did anything wrong or not. And you'll almost certainly cost a lot of people who made honest mistakes a lot of money.
So, no, it's not at all clear that the IRC should be revenue-maximizing.
Nah, until we get better returns on other endeavors for the same dollar.
They can send a letter asking for documentation for everything the automated system flags. The automated system detects "simple" cases at a far higher confidence ratio, which tends to be lower income. Once you get upper income, with all manner of complicated itemized deductions, the confidence of the automated system is much lower, and the effort to ask for appropriate documentation, and verify it, is much higher, for a much lower expectation of return (since, again, low confidence from the system).
>I missed it on my own review because it was one of many returns I had to file.
Honestly, I look through my returns but they're way past the point where I could find most errors even though my finances aren't especially complex.
Some really large proportion of Americans are basically W-2 filers taking the standard deduction. These Americans have no opportunity to evade taxes.
Most income tax fraud probably takes place in the area of passthrough businesses and other areas where tax verification isn't simply a problem of reconciling what employer A (or brokerage B, for dividends and stock sales, or bank C, for interest) said they paid to person P with what person P reported on their return.
TL;DR - it's hard to execute a fraud when the IRS already has the corresponding 1099s on-file for you.
I think there’s a lot of opportunity related to kids. Deductions and credits vary and can be mistakenly or willfully claimed.
I think there is a misunderstanding of what an 'audit' means. It can be as simple as a letter from the IRS (after their analysis alerts them) asking that certain documents be provided to support a deduction or otherwise. The IRS is not conducting large scale audits on people with low incomes it would not be feasible there is not enough to even dig into.
What the government (in this particular case for the EITC) should be easy for the taxpayer to reply with info needed to dispute the claim.
That is a strong statement! It is not true, some times that is where they are.
Actually if it is the only place you could find them (the rest of the street is too dark, you do not have a torch to see or fingers to feel....) it is an optimal, albeit dismal, strategy
Loving digression.....
https://en.wikipedia.org/wiki/Streetlight_effect
>A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys and they both look under the streetlight together. After a few minutes the policeman asks if he is sure he lost them here, and the drunk replies, no, and that he lost them in the park. The policeman asks why he is searching here, and the drunk replies, "this is where the light is".
Hence, the drunk and the policeman are never going to find the keys under the streetlamp because they were lost in the park.
Source? What category of stuff the IRS ignores adds up to more than $20 billion?
The IRS estimates there's a net tax gap of $554 billion in 2019. They break it down into 5 categories with values from 2011-2013 that all are over 20 billion each: underreported income, over/misreported adjustments, underpayment, non-filing, and other underreporting. They note that their 2011-2013 estimate failed to include underreporting of offshore wealth and wealth going through pass through entities, which resulted in a tax gap of $33 billion per year to the 2011-2013 estimate and 46 billion for 2019.