"23,000 households reported income over $10 million last year. The IRS audited seven
Michael Hiltzik
Mon, November 2, 2020
Since we'll be spending the next day or so pondering America as it is and as we wish it to be, let's take a moment to contemplate how tax avoidance and evasion have become facts of life for some of the richest Americans.
They've done so with the connivance of our lawmakers, who have tied the hands of the Internal Revenue Service. The latest analysis of the situation came to us last week from David Cay Johnston, a journalist who has made the inequities of the income tax into a personal cause.
Johnston's source material is official IRS statistics, so let's delve into the facts alongside him.
IRS research studies from decades ago noted that at that time, the IRS pursued most nonfiler leads. However...that no longer appears to be the case.
Here's the most eye-opening statistic. Some 23,456 U.S. households reported income of $10 million or more last year (that is, for the 2018 tax year), averaging more than $26 million each in taxable income. The IRS audited seven of them.
That comes to less than three-hundredths of a percent. That's about the chance of being struck by lightning at some point in your lifetime. So it may not be surprising that wealthy taxpayers don't think they're living dangerously with the IRS.
A chart showing a drop in IRS audits from 2011 to 2017, especially of the rich.
The IRS responded to its shrinking resources by cutting audits of the rich much faster than it cut audits of the poor. (ProPublica)
As it happens, however, America's lowest-income households have much more to fear from the tax collector. Those with taxable income below $25,000 were audited at nearly 10 times the rate of the richest households, even though their average taxable income came to about $11,000 each.
Targeting low-income taxpayers won't do much to close the so-called tax gap — the difference between what the government expects to collect in taxes and what it does collect. The IRS has estimated the gap at about $441 billion a year in tax years 2011 through 2013.
But underpayment on this scale is more than a fiscal issue. It has a corrosive effect on trust in government broadly and the general public's willingness to comply with tax law more specifically.
Revelations about President Trump's years of tax shenanigans provide a model for the benefits of skipping out on one's obligations, or the lack of consequences thereof.
It's a rule of thumb in the tax world that almost no activity is as cost-effective at securing revenue as enforcing the tax law — or as detested by tax-avoiders. It's hardly surprising, then, that tax cheating has soared as the IRS' capacity to ferret it out has shrunk. In 2010, the IRS had 94,700 full-time staff and a budget of $14.7 billion. By the last fiscal year it was down to 73,554 full-timers and a budget of only $11.8 billion.
Congress hasn't entirely impoverished the IRS. After passing a massive tax cut aimed chiefly at corporations and the rich in 2017, Republicans gifted the agency with $320 million in new funding. But as a 2018 analysis by ProPublica noted, the money could be spent only on devising regulations to put the tax cut into action. Not a dime was to be spent on enforcement."
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