As this is written, April 15 – and with it Income Tax Day – is only a week away and offers another opportunity to ask, “who pays” and to look at the way the government enforces collection of federal income taxes.
Several years ago the Internal Revenue Service (IRS) announced its intention to step up the auditing of tax returns filed by low-income taxpayers, especially those filing for the Earned Income Tax Credit (EITC). Under that program – enacted during the Reagan administration – a low-income working family, depending on size and income, can claim a rebate of as much as $4,008.
Although these families are special targets, the IRS looks for tax cheating by all wage-earners far more carefully than it looks for cheating by people whose money comes from their own businesses, investments, partnerships and trusts.
The greater scrutiny begins with their employers, who must report wages in detail to the IRS. Banks report interest earned on savings accounts and paid on home mortgages. Churches and charities must issue receipts on donations of more than $249.99.
Audits of taxes paid by the working poor now account for more than half of all IRS audits as agents, armed with powerful computers, comb through the returns of the 19 million families who apply for the EITC. In addition to W-2s, some are required to produce other evidence including marriage licenses and school report cards to prove the existence of a child in the home.
While the IRS employs 2,200 people to stop what is at most $9 billion in cheating by these low-income wage earners, it employs only about eight times that many people to hunt for all other kinds of cheating, which some experts estimate at more than $300 billion annually. As a result, the chance of being audited if one applied for the EITC was 1 in 47 last year. But the chance was 1 in 145 for people earning more than $100,000.
But a much smaller group of Americans – almost all of them among the wealthiest 5 percent – are subjected to less rigorous standards because, for them, there is no third party like an employer or a bank to verify their tax report.
IRS officials say cheating on partnership income illustrates weaknesses in stopping abusive tax avoidance among the affluent where as much as 20 percent of income goes unreported, shortchanging the Treasury Department by as much as $64 billion. The IRS admits that, were these taxes collected, it would be enough to exempt from income taxes the 62.5 million taxpayers – half of all those who file – who made less than $26,500 last year and still leave $29 billion.
It is little wonder that the principal Congressional subcommittee assigned to oversee the IRS – headed by Amo Houghton, a New York Republican and the richest member of Congress – has held no hearings on tax cheating by the wealthiest. In a recent interview, he said he was unaware of any problem of tax cheating by high-income Americans except for what he read in the newspapers.
The author can be reached at pww@pww.org
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