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The IRS Is Letting the Rich Get Away With Tax Evasion

New data shows a huge drop in tax audits of the wealthy and corporations. The IRS is hounding working people but letting the rich get away with murder.

The Internal Revenue Service (IRS) building. (Martin Haesemeyer / flickr)

By some estimates, the wealthiest 1 percent of Americans manage to avoid paying about a quarter-trillion dollars of owed taxes every single year. Now, new government data show that audits of the superrich and large corporations have hit a new low, leaving billions of dollars of uncollected taxes at precisely a moment when lawmakers say new revenue is needed to fund infrastructure and climate investments.

In response, two progressive Democratic lawmakers have authored legislation cracking down on tax evasion.

The new Internal Revenue Service (IRS) figures compiled by Syracuse University researchers show that in the last eight years, there has been a 72 percent drop in the number of audits of those making more than $1 million. In all, 98 percent of those making more than $1 million did not face an audit last year.

Similarly, there has also been a 55 percent drop in the number of audits of America’s largest corporations. In 2012, almost all corporate giants were audited. In 2020, however, almost two-thirds of those corporations were not subjected to audits.

Source: Syracuse University’s Transactional Records Access Clearinghouse

Amid this decline in scrutiny of the rich, a letter to the Biden administration from eighty-eight progressive groups pointed out: “Since 2011, audit rates for millionaires, who are disproportionately white, have dropped more than twice as much as for taxpayers claiming the (Earned Income Tax Credit), who are disproportionately people of color. Audit coverage is now the heaviest in many low-income majority-Black counties.”

The sharp reduction in audits of the rich contributes to the tax gap between the amount of taxes owed and paid. In 2012, audits of wealthy individuals and large corporations recovered roughly $29 billion of revenue. Eight years later, far fewer audits recovered less than $7 billion. IRS referrals for criminal prosecution and Justice Department tax convictions have both hit an all-time low.

“At a time when Americans face growing economic inequality and financial hardship caused by the COVID-19 pandemic, the IRS is letting billions of dollars in tax revenue slip through its fingers,” wrote Syracuse researchers. “As public attention focuses on how the country can restore faith in our democratic institutions, one area that should not be overlooked is how the nation can better ensure that our income tax laws are fairly and effectively administered.”

“High-Income Taxpayers Are Generally Not a Collection Priority”

The situation is the result of both agency priorities and funding cuts.

A recent report from the Treasury Department’s inspector general concluded that, at the IRS, “high-income taxpayers are generally not a collection priority, nor is there a strategy in place to address nonpayment by high-income taxpayers.” As evidence, the report showed that the agency failed to recover more than 60 percent of the $4 billion in back taxes owed by those making more than $1.5 million.

At the same time, overall enforcement has been hobbled by draconian budget reductions that have resulted in 43 percent fewer IRS revenue agents and 26 percent fewer IRS criminal investigators in the last decade, according to the Syracuse data.

Between 2010 and 2018, the IRS’s budget has been slashed by more than 20 percent, and its enforcement budget has been cut by 24 percent, according to the Center on Budget and Policy Priorities.

Source: Center on Budget and Policy Priorities

“The IRS is effectively the accounts receivable department for the United States government,” wrote the National Taxpayer Advocate, an independent watchdog inside the agency. “However, the IRS’s budget does not reflect the critical role the agency plays and, as a result, its shrinking workforce and need to upgrade its IT capabilities continue to hamstring the agency’s work.”

Progressive Democratic Lawmakers Push for a Crackdown

Following the passage of the $1.9 trillion stimulus bill, the drumbeat for budget cuts and austerity is already getting louder among lawmakers and Washington think tanks trying to sound the alarm about the national deficit. It might seem like that could complicate any attempt to boost the IRS budget, but it’s actually the other way around: boosting the agency’s resources would likely reduce the deficit.

A July 2020 report from the nonpartisan Congressional Budget Office found that increasing funding for IRS enforcement by $40 billion would boost revenues by more than $100 billion over the next decade. New York University tax law professor Chye-Ching Huang has noted that in 2013, the Treasury Department estimated “that each additional dollar dedicated to IRS enforcement results in directly recouping about $6 in taxes owed.”

To that end, representatives Ro Khanna (D-CA) and Peter DeFazio (D-OR) — both Congressional Progressive Caucus members — have recently introduced separate bills that would boost the IRS’s enforcement budget and audit rates.

Khanna’s legislation is the more aggressive of the two. The bill would increase IRS enforcement funding by $70 billion and require the agency to audit 95 percent of large corporations, 50 percent of individuals reporting more than $10 million of annual income, and 20 percent of individuals reporting more than $1 million of income.

“After years of Republican budget cuts and skewed priorities, the IRS now audits those who make $20,000 at about the same rate as the top 1%, even though the vast majority of unpaid taxes are attributable to wealthy tax cheats,” said Frank Clemente of Americans for Tax Fairness, which advocates for higher taxes on the wealthy. “Rep. Khanna’s bill would go a long way towards making things right. It mandates minimum audit levels for the wealthy and large corporations and gives the IRS the funding it needs to help make sure that those at the top are paying their fair share of taxes.”