As one of the resident right-of-center folks who comment, I feel the need to register my strong agreement with everything in this column. I think Matt hit all the right points and the increase in IRS funding is the best part of the recently-passed bill.
The IRS/police analogy is not a great one. Citizens enjoy *much* stronger due process protections when dealing with police than they do with the IRS. The police are not entitled to come into my house and rummage around in hopes of finding evidence of wrongdoing; nor can they require me to make detailed, costly reports of my whereabouts with enormous penalties for even inadvertent noncompliance.
Of course taxes are the cost we pay for civilization. But America tries to do far too much with its income tax, and the result is a complex nightmare that terrifies even honest taxpayers.
> So you can be as cynical about the IRS and its agents’ motives as you like, but unless they are being specifically pressured by congressional Republicans to focus their audits on the poor (which they do tend to do)
I’d like to contest the point that the poor are being disproportionately audited out of spite as reported in that WP piece. [1] From that article
> That is partly because the lowest-income filers are the ones getting the most enforcement: Households poor enough to receive the earned-income tax credit are five times more likely to be audited than higher-earning filers, according to research released by Syracuse University’s Transactional Records Access Clearinghouse.
From what I’ve read, EITC audits are pretty simple and result from automatically detectable errors. A common example is two tax filers both claiming the same dependent child. This is trivially easy for the IRS to detect since you have to list the SSN of claimed dependents. And the IRS has found that EITC errors are quite common. [2]
> Over 26 million taxpayers receive over $64 billion in EITC benefits. The National Research Program (NRP) estimates that approximately 50% of EITC claims have errors and the $18.1 billion improper payments account for almost half of the $40 billion portion of the tax gap attributable to credits.
> In FY 2017, risk-based scoring identified about 6.4 million returns as claiming a potentially erroneous EITC due to a qualifying child issue or misreported income.
> The IRS planned to audit approximately 300,000 EITC returns for over the past 5 years and plans to continue to audit about 300,000 returns each year in the future. EITC correspondence audits are the most efficient use of available IRS examination resources with the average time to complete the audit of 5 hours per return.
Further, almost all EITC audits are correspondence audits; a small-scale audit where the IRS mails a form explaining the issue and asks the filer to either provide some proof or pay the difference of a revised tax filing. [3] These don’t take a lot of time and further provide the necessary clarification to prevent the same mistake in the future.
There is still a lot that could be done in terms of tax filer education, or even better an IRS-funded tax filing website. Similarly, with more funding for customer support the IRS will be able to provide more time in answering questions and helping people file the correct taxes initially. Here’s a good critical review of EITC audits and proposals for improvements, The Long Read: Auditing earned income, https://tax.thomsonreuters.com/news/the-long-read-auditing-earned-income/
1. I don't deny people should pay their taxes, and small business people who overclaim expenses should face audits. So I don't even really think I oppose the bill.
2. Stop with the "tax police". That's just juvenile spin. If saying "the IRS", a totally value-neutral term, reduces the popularity of what you are arguing, that should be a meaningful data point for a writer who cares about popularism.
3. Matt goes on and on about Italy, but his own data shows that even with the tax avoidance we have, we are not Italy. Indeed, despite the fact that Republicans have supposedly defunded the IRS for 30 years, we still... collect most of our taxes compared to other countries. Where's the crisis?
4. My real problem with all of this is that it is being sold as some attack on super-rich people who have complex tax shelters and such. But the problem is, the Democrats want to use this to raise revenue so they don't have to pass an open tax increase. And to do that, they have to go after small businesses, because that's where the money is. Which is... fine, I guess. But it makes the spin very dishonest.
The Republicans offered an amendment that would have limited the new enforcement to taxpayers making over $400,000. The Democrats voted it down. That was telling. They need to be able to go after upper-middle class small businesspeople, or this won't raise any money, because when you take on the very rich, the enforcement costs are huge- they hire good lawyers and fight.
So in the end, this is basically just an attempt to collect more taxes from small business. Which is fine- they owe them. But it isn't this great righteous crusade against tax evasion by the very rich. Such a crusade will cost real money, and the Democrats want this to count as a stealth tax increase and won't do that.
Another provision of the IRA: America may soon join other high income countries in providing a free, "pre-populated," e-forms filing service. This link suggests about half the country would benefit (a feasibility report must be provided to Congress within nine months):
It's not clear to me whether the IRS can proceed do this after the report is filed or not. I'm assuming it'll take further congressional authorization. Intuit, by the way, are some of the most brazen rent-seekers on the planet.
Good lord, I just want better customer service. I run a business and have a couple over the years. I’ve been audited several times and the money I’ve spent on financial and legal advice is painful. So much time just waiting on responses to questions and letters. Going through an IRS audit feels like traveling back to before email or phones were invented.
I have two brothers in law that run successful businesses. One runs restaurants, and one as a contractor business. I also know a whole bunch of other small business owners. Let’s just say that shenanigans are fairly common. Legal and illegal.
The contractor brother-in-law is so successful he is having issues spending enough money. He’s in a race before December to put up a new steel building. By a backhoe. And a dump truck.
There is still people working in the restaurant industry they get paid under the table, though this is actually way less common now. Credit cards have made things like this harder. There is just less cash to have a free hand with. Also there are a lot less purely illegal immigrants than there have been in the past. This partly contributes to the labor shortage.
My wife actually used to own a restaurant and run it. She had a big run-in with the IRS which in part prompted her to sell the business because she didn’t like the stress.
One of the biggest problems is that our tax code is so complicated. Every complication is an opportunity to look for loopholes or shenanigans. I agree that we should fund the tax police, but we should also consider simplifying our tax laws.
On another note, I have a cabin up in the mountains of Eastern Oregon. Maybe I should start a farm.
The column could just as well be subtitled, 'the rule of law for thee but not for me.' For the overwhelming number of Americans increased enforcement of tax laws will have no effect. The Government already knows what your income is and in some cases also major deductions (SALT and mortgage interest). Payroll income already includes tax withholding and most investment income such as stock dividends and capital gains from sales are reported to the Government. Even most private equity and hedge fund manager income is known.
Those objecting to increased IRS monitoring are likely to be the ones who have been skirting tax laws and reporting requirements. They should be made to pay their share of taxes just as those of us whose income is fully reported to the Government.
It seems like even the IRA is not spending enough on tax enforcement. We should be on the other side of the enforcement curve where increasing IRS funding doesn't increase revenue enough to pay for itself. Having a society where people follow tax laws is worth paying for.
TBH, I am disappointed they are going out of their way to *not* audit the 100K-400K small business owner class, many of whom openly brag, like Trump does, that taxes are for suckers.
Besides, it's not hard to find the tax cheats. Audit any company that won't process credit cards, and open a reporting line giving amnesty for "paid in cash" employees in return for ratting out their tax skirting employer.
As a fastidious taxpayer, I agree with the gist of this article. But Matt isn't sufficiently addressing the reason the bill has been criticized: our tax code allows the wealthy and well-counseled to evade taxes above board, while confusing the hell out of average citizens.
My wife is a freelancer. Many in her position cheat, but it's onerous to get it right even if you want to. We spent hours trying to figure out whether we could claim the corner of our bedroom dedicated to her desk as a home office space (the answer: maybe).
Of course if we could afford a place with a separate home office for her, we could clearly claim that. There are tax advantaged corporate structures that wouldn't be worth taking advantage of at her income level. And Congress can provide IRS enforcement funding but can't pass carried interest tax reform.
I want people to pay what they owe in taxes. But I can see why it feels like a slap in the face to juice enforcement without implementing tax reform, and I certainly worry this will hit middle class freelancers and small business owners hardest.
This is my favorite kind of Matt post, something that I hadn't thought through, but when you think about it is clearly correct, but I wouldn't have been able to articulate so clearly on my own.
That said, I think you have to be careful with tax enforcement. I own a small business. It used to be located in Washington State. Instead of an income tax, Washington State has a "Business and occupation" tax, which taxes top-line business revenues at 3 different rates. My accountant had advised me that my business was retailing, and as a result I owned very few taxes (because I could deduct out of state sales). Several years in, a state collector called, yelled at me, and told I owed a large amount of taxes because it wasn't retailing. My accountant was of no help. I owed a lot, but not enough to talk to interest a tax lawyer in talking to me.
I paid the taxes. Then entirely on my own discovered that there is an obscure board in Washington that will issue written opinions on your tax category. I wrote them a long letter describing how our business worked (it wasn't unique or obscure). Many months later, it came back all "retailing". After many more months, I got all my money back. I also left washington state.
There are two things about this that matter. (1) The person who called me on the phone was clearly operating on some kind of quota scheme, and was clearly trying to meet her quota. She wasn't trying to get at the truth, she was trying to find a business which would not have enough resources to figure out it had been ripped off, and (2) During the course of many phone calls, she said to me "Well, see, what you did is innovation. In Washington, innovation costs extra." Those were her exact words. I remember them 20 years later. She was talking about _my_ innovation. She was right, I had innovated, but those words definitely left a bad taste in my mouth.
So, as clean as Matt's argument is, you have to be careful about how you motivate enforcers. You can end up alienating people who are 100% law abiding.
Second, the lawyer with the cattle was most likely getting his ag property tax exemption - there's a formula in each county for how many of any particular type of animal (or insect, bees can count) you need to pay the far lower agricultural property tax rate rather than the residential or commercial one. Back in the 1980s, EDS' HQ on the (then) outskirts of Dallas had cows on it for just that reason, according to a friend who worked there. Counting animals is an easy, objective test - makes tax enforcement easy. But it is also easy to "game". On the other hand, your lawyer acquaintance was adding to the beef supply. Tax avoidance or reasonable response to incentives?
Finally, tax compliance would go way up if the tax code were simplified. There's enormous play in many of the regulations and what is and isn't legal is often unclear (making lawyers and accountants lots of money). Then there are all the "special" bits of the code - the lengthy memoir "A Lawyer's Life: Deep in the Heart of Taxes" by Edwin S. Cohen, a very successful tax lawyer who worked for Treasury, etc. as well as in private practice, is a great source. One of his stories - recounted with pride - is how he got a special tax break for the University of Virginia (he was an alumnus) to fund renovations of frat houses by using his UVA connections on the Hill. With a tax code filled with such stuff, it is no surprise that many people think the game is rigged. It is rigged!
Finally, enforcement is an issue. We should enforce laws or repeal them. But the IRS has been used as a weapon at times and the IRS has shown remarkable incompetence at others. There is a case for some serious reform. Things may not be as bad as Republican talking points suggest, but they aren't rosy either. Good governance is really hard - as the late economist Rick Stroup said, it is the ultimate public good. Having a really complicated tax code stuffed with special interest provisions makes it harder.
As one of the resident right-of-center folks who comment, I feel the need to register my strong agreement with everything in this column. I think Matt hit all the right points and the increase in IRS funding is the best part of the recently-passed bill.
The IRS/police analogy is not a great one. Citizens enjoy *much* stronger due process protections when dealing with police than they do with the IRS. The police are not entitled to come into my house and rummage around in hopes of finding evidence of wrongdoing; nor can they require me to make detailed, costly reports of my whereabouts with enormous penalties for even inadvertent noncompliance.
Of course taxes are the cost we pay for civilization. But America tries to do far too much with its income tax, and the result is a complex nightmare that terrifies even honest taxpayers.
> So you can be as cynical about the IRS and its agents’ motives as you like, but unless they are being specifically pressured by congressional Republicans to focus their audits on the poor (which they do tend to do)
I’d like to contest the point that the poor are being disproportionately audited out of spite as reported in that WP piece. [1] From that article
> That is partly because the lowest-income filers are the ones getting the most enforcement: Households poor enough to receive the earned-income tax credit are five times more likely to be audited than higher-earning filers, according to research released by Syracuse University’s Transactional Records Access Clearinghouse.
From what I’ve read, EITC audits are pretty simple and result from automatically detectable errors. A common example is two tax filers both claiming the same dependent child. This is trivially easy for the IRS to detect since you have to list the SSN of claimed dependents. And the IRS has found that EITC errors are quite common. [2]
> Over 26 million taxpayers receive over $64 billion in EITC benefits. The National Research Program (NRP) estimates that approximately 50% of EITC claims have errors and the $18.1 billion improper payments account for almost half of the $40 billion portion of the tax gap attributable to credits.
> In FY 2017, risk-based scoring identified about 6.4 million returns as claiming a potentially erroneous EITC due to a qualifying child issue or misreported income.
> The IRS planned to audit approximately 300,000 EITC returns for over the past 5 years and plans to continue to audit about 300,000 returns each year in the future. EITC correspondence audits are the most efficient use of available IRS examination resources with the average time to complete the audit of 5 hours per return.
Further, almost all EITC audits are correspondence audits; a small-scale audit where the IRS mails a form explaining the issue and asks the filer to either provide some proof or pay the difference of a revised tax filing. [3] These don’t take a lot of time and further provide the necessary clarification to prevent the same mistake in the future.
There is still a lot that could be done in terms of tax filer education, or even better an IRS-funded tax filing website. Similarly, with more funding for customer support the IRS will be able to provide more time in answering questions and helping people file the correct taxes initially. Here’s a good critical review of EITC audits and proposals for improvements, The Long Read: Auditing earned income, https://tax.thomsonreuters.com/news/the-long-read-auditing-earned-income/
[1] https://www.washingtonpost.com/opinions/2022/04/15/frustrated-with-irs-call-republican/
[2] https://www.irs.gov/newsroom/irs-update-on-audits
[3] https://www.irs.gov/charities-non-profits/correspondence-audit
I did a quick Twitter thread on this (you can find it here https://twitter.com/dilanesper/status/1562025435516440576 ) but my basic problem is more with the way this is being sold than the actual thing itself:
1. I don't deny people should pay their taxes, and small business people who overclaim expenses should face audits. So I don't even really think I oppose the bill.
2. Stop with the "tax police". That's just juvenile spin. If saying "the IRS", a totally value-neutral term, reduces the popularity of what you are arguing, that should be a meaningful data point for a writer who cares about popularism.
3. Matt goes on and on about Italy, but his own data shows that even with the tax avoidance we have, we are not Italy. Indeed, despite the fact that Republicans have supposedly defunded the IRS for 30 years, we still... collect most of our taxes compared to other countries. Where's the crisis?
4. My real problem with all of this is that it is being sold as some attack on super-rich people who have complex tax shelters and such. But the problem is, the Democrats want to use this to raise revenue so they don't have to pass an open tax increase. And to do that, they have to go after small businesses, because that's where the money is. Which is... fine, I guess. But it makes the spin very dishonest.
The Republicans offered an amendment that would have limited the new enforcement to taxpayers making over $400,000. The Democrats voted it down. That was telling. They need to be able to go after upper-middle class small businesspeople, or this won't raise any money, because when you take on the very rich, the enforcement costs are huge- they hire good lawyers and fight.
So in the end, this is basically just an attempt to collect more taxes from small business. Which is fine- they owe them. But it isn't this great righteous crusade against tax evasion by the very rich. Such a crusade will cost real money, and the Democrats want this to count as a stealth tax increase and won't do that.
Another provision of the IRA: America may soon join other high income countries in providing a free, "pre-populated," e-forms filing service. This link suggests about half the country would benefit (a feasibility report must be provided to Congress within nine months):
https://www.propublica.org/article/files-taxes-free-inflation-reduction-act
It's not clear to me whether the IRS can proceed do this after the report is filed or not. I'm assuming it'll take further congressional authorization. Intuit, by the way, are some of the most brazen rent-seekers on the planet.
Does this have anything to do with why all the commercials on conservative TV and Radio growing up were for tax lawyers?
DO YOU OWE THE IRS 10, 20, even 30 THOUSAND DOLLARS? Call Bob’s discount tax dodging emporium!
Says a lot about their viewers if this is one of the main industries advertising in those markets.
Good lord, I just want better customer service. I run a business and have a couple over the years. I’ve been audited several times and the money I’ve spent on financial and legal advice is painful. So much time just waiting on responses to questions and letters. Going through an IRS audit feels like traveling back to before email or phones were invented.
As someone who’s still waiting for their 2019 tax refund, I’m very excited to see $20 billion go into customer service.
I have two brothers in law that run successful businesses. One runs restaurants, and one as a contractor business. I also know a whole bunch of other small business owners. Let’s just say that shenanigans are fairly common. Legal and illegal.
The contractor brother-in-law is so successful he is having issues spending enough money. He’s in a race before December to put up a new steel building. By a backhoe. And a dump truck.
There is still people working in the restaurant industry they get paid under the table, though this is actually way less common now. Credit cards have made things like this harder. There is just less cash to have a free hand with. Also there are a lot less purely illegal immigrants than there have been in the past. This partly contributes to the labor shortage.
My wife actually used to own a restaurant and run it. She had a big run-in with the IRS which in part prompted her to sell the business because she didn’t like the stress.
One of the biggest problems is that our tax code is so complicated. Every complication is an opportunity to look for loopholes or shenanigans. I agree that we should fund the tax police, but we should also consider simplifying our tax laws.
On another note, I have a cabin up in the mountains of Eastern Oregon. Maybe I should start a farm.
The column could just as well be subtitled, 'the rule of law for thee but not for me.' For the overwhelming number of Americans increased enforcement of tax laws will have no effect. The Government already knows what your income is and in some cases also major deductions (SALT and mortgage interest). Payroll income already includes tax withholding and most investment income such as stock dividends and capital gains from sales are reported to the Government. Even most private equity and hedge fund manager income is known.
Those objecting to increased IRS monitoring are likely to be the ones who have been skirting tax laws and reporting requirements. They should be made to pay their share of taxes just as those of us whose income is fully reported to the Government.
It seems like even the IRA is not spending enough on tax enforcement. We should be on the other side of the enforcement curve where increasing IRS funding doesn't increase revenue enough to pay for itself. Having a society where people follow tax laws is worth paying for.
TBH, I am disappointed they are going out of their way to *not* audit the 100K-400K small business owner class, many of whom openly brag, like Trump does, that taxes are for suckers.
Besides, it's not hard to find the tax cheats. Audit any company that won't process credit cards, and open a reporting line giving amnesty for "paid in cash" employees in return for ratting out their tax skirting employer.
As a fastidious taxpayer, I agree with the gist of this article. But Matt isn't sufficiently addressing the reason the bill has been criticized: our tax code allows the wealthy and well-counseled to evade taxes above board, while confusing the hell out of average citizens.
My wife is a freelancer. Many in her position cheat, but it's onerous to get it right even if you want to. We spent hours trying to figure out whether we could claim the corner of our bedroom dedicated to her desk as a home office space (the answer: maybe).
Of course if we could afford a place with a separate home office for her, we could clearly claim that. There are tax advantaged corporate structures that wouldn't be worth taking advantage of at her income level. And Congress can provide IRS enforcement funding but can't pass carried interest tax reform.
I want people to pay what they owe in taxes. But I can see why it feels like a slap in the face to juice enforcement without implementing tax reform, and I certainly worry this will hit middle class freelancers and small business owners hardest.
This is my favorite kind of Matt post, something that I hadn't thought through, but when you think about it is clearly correct, but I wouldn't have been able to articulate so clearly on my own.
That said, I think you have to be careful with tax enforcement. I own a small business. It used to be located in Washington State. Instead of an income tax, Washington State has a "Business and occupation" tax, which taxes top-line business revenues at 3 different rates. My accountant had advised me that my business was retailing, and as a result I owned very few taxes (because I could deduct out of state sales). Several years in, a state collector called, yelled at me, and told I owed a large amount of taxes because it wasn't retailing. My accountant was of no help. I owed a lot, but not enough to talk to interest a tax lawyer in talking to me.
I paid the taxes. Then entirely on my own discovered that there is an obscure board in Washington that will issue written opinions on your tax category. I wrote them a long letter describing how our business worked (it wasn't unique or obscure). Many months later, it came back all "retailing". After many more months, I got all my money back. I also left washington state.
There are two things about this that matter. (1) The person who called me on the phone was clearly operating on some kind of quota scheme, and was clearly trying to meet her quota. She wasn't trying to get at the truth, she was trying to find a business which would not have enough resources to figure out it had been ripped off, and (2) During the course of many phone calls, she said to me "Well, see, what you did is innovation. In Washington, innovation costs extra." Those were her exact words. I remember them 20 years later. She was talking about _my_ innovation. She was right, I had innovated, but those words definitely left a bad taste in my mouth.
So, as clean as Matt's argument is, you have to be careful about how you motivate enforcers. You can end up alienating people who are 100% law abiding.
Some small points - the tax gap is remarkably stable, as described by my friend and former colleague, Jack Manhire, here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3218110
Second, the lawyer with the cattle was most likely getting his ag property tax exemption - there's a formula in each county for how many of any particular type of animal (or insect, bees can count) you need to pay the far lower agricultural property tax rate rather than the residential or commercial one. Back in the 1980s, EDS' HQ on the (then) outskirts of Dallas had cows on it for just that reason, according to a friend who worked there. Counting animals is an easy, objective test - makes tax enforcement easy. But it is also easy to "game". On the other hand, your lawyer acquaintance was adding to the beef supply. Tax avoidance or reasonable response to incentives?
Finally, tax compliance would go way up if the tax code were simplified. There's enormous play in many of the regulations and what is and isn't legal is often unclear (making lawyers and accountants lots of money). Then there are all the "special" bits of the code - the lengthy memoir "A Lawyer's Life: Deep in the Heart of Taxes" by Edwin S. Cohen, a very successful tax lawyer who worked for Treasury, etc. as well as in private practice, is a great source. One of his stories - recounted with pride - is how he got a special tax break for the University of Virginia (he was an alumnus) to fund renovations of frat houses by using his UVA connections on the Hill. With a tax code filled with such stuff, it is no surprise that many people think the game is rigged. It is rigged!
Finally, enforcement is an issue. We should enforce laws or repeal them. But the IRS has been used as a weapon at times and the IRS has shown remarkable incompetence at others. There is a case for some serious reform. Things may not be as bad as Republican talking points suggest, but they aren't rosy either. Good governance is really hard - as the late economist Rick Stroup said, it is the ultimate public good. Having a really complicated tax code stuffed with special interest provisions makes it harder.
What's the moral difference between mischaracterizing tourism expenses vs. working while on a tourist visa?