The IRS is going after the little guy
If you thought the IRS audited complicated, high-dollar tax returns, think again. It turns out that the poorest among America's taxpayers are the most likely to be audited. According to the Transactional Records Access Clearinghouse (TRAC), an organization dedicated to giving Americans information about what their federal government does and how much it costs, America's lowest income earners are five times more likely to be audited than wealthier people.
TRAC reported that the IRS audited 0.4% of the 160 million individual income tax returns it processed each year. Most of these audits were accomplished by "correspondence audits." This means that the IRS sends a letter to the taxpayer asking for documentation proving a specific line item in the return. Of the 659,003 audits the IRS conducted last year, 85% of them were correspondence audits.
What's noteworthy is the targets of these very simple audits:
[O]ver half of these correspondence audits were targeted at the small proportion of workers with incomes so low they had claimed an anti-poverty earned tax credit to offset the tax otherwise due on their modest earned income. To repeat: over half — fully 54 percent — of all correspondence audits last year targeted the small proportion of returns with gross receipts of less than $25,000 claiming an earned income tax credit.
Even taxpayers with total positive income from $200,000 to $1,000,000 had only one-third the odds of audit compared with these lowest income wage earners. A total of nearly 9 million taxpayers reported these high-income levels. Yet less than 40 thousand of their returns were audited by the IRS in FY 2021 — just 4.5 out of every 1,000 of these returns. [Citation omitted.] This contrasts sharply with 13.0 out of every 1,000 of these lowest income returns that were audited last year by the IRS.
An advocate for taxpayers, Erin M. Collins, filed a report with Congress stating that the problem is that the IRS is insufficiently staffed. This means that people were unable to get the help they needed when preparing their taxes, which would have helped them to avoid an audit.
Another factor has to do with the nature of IRS staffing. Over the last ten years, the staffing has shifted from IRS revenue agents, who have the training and experience to audit complex tax returns, to IRS examiners, who earn less money, are less knowledgeable, and can do only the tightly targeted correspondence audits.
For these examiners, the best way to get their work done is via these letters, which are essentially form letters, with only the recipient's name, the line item, and the dollar amounts being different. Once the examiner has completed a letter, there's little left to do. In most cases, the frightened recipient, if the amount demanded isn't too overwhelming, will just pay it. After all, the person, being poor, can't afford a lawyer or accountant and certainly isn't going to fight the IRS. I'm betting these letters have a huge and easy closure rate.
The IRS's ability to target people is aided by the tax code's overwhelming complexity, which only begins with having a progressive tax code rather than a simple flat tax. A flat tax would have a huge impact on the IRS and the economy. It would put a lot of accountants and IRS agents out of business, so it could, perhaps, be phased in slowly.
The beauty of a pure flat tax is that everyone would pay the same percentage. The money spent on paperwork, attorneys, accountants, and audits could be used to make businesses grow, fund home purchases, and raise families. The government, too, would benefit from real money flowing in because it would no longer have to spend massive amounts of money to chase after money.
Another (and, to my mind, better) way is a national sales tax instead of an income tax. Because rich people consume a great deal more than poor people, they would pay significantly more. In addition, a national sales tax would mean that every American contributes to the economy, rather than the situation we have now, in which around 60% of American households pay no taxes. It's very dangerous to have a society in which well over half the people are takers, not contributors. People who have a stake in something (and don't feel cheated by it) tend to be more committed to keeping the system functioning.