Does it cost more to collect taxes from lower brackets than they pay?

Title says it all, really. On a recent drive I got to wonder whether the administration of collecting taxes from net recipients was even completely offset by what was taken in. Of course, what’s a net recipient. But I mean, lower income brackets who still pay income taxes. Are we doing it just because everyone should pay taxes, to monitor incomes, …? Or are we actually getting something out of it?

If you divided the cost by the total number of people and then looked at the lower income people, you might come to that conclusion. Once the huge apparatus is in place it doesn’t cost much more at all in incrementally add more people.

Haj

Well the median income level is like, what, 32,000 or something like that? Perhaps you’re right, then.

To expand upon hajaro’s post, say a person was only going to pay $100 in taxes. It costs almost nothing to keep them in the system, mail them out the standard forms, and process their return. Probably in the pennies considering the ecominics of volume. However, if any special work is necessary on their return things quickly reverse and the government is losing money.

Even though they may lose money forcing a single individual to pay taxes when they don’t want to, for example, they still have to. If it became known that the government doesn’t care if you even file if your income is low enough, then many people will do this and fed loses money. So, you have to spend more effort than it is worth on an individual in order to get the vast majority to fall in line and make a net profit.

NO, NO.
You’ve got it all backward. The IRS pays out to the lowest income brackets.

Yeah, I’m not worried about them. Obviously it costs money to give people money. But there are still people who don’t make a whole lot that pay taxes.

More than once working crappy part time jobs that ended at funny times of the year I have spent nearly as much on the stamp as I got back. So it costs more to me sometimes, at least! The IRS has never kept a cent of my money. I definately cost more than I make for them because I don’t make anything for them and any costs on their part for the paperwork and transfers and things are never recouped. This will hopefully change this year, when I may really have to pay taxes! Whee!

I’m a trustee for my neice and nephews, and have to fill out pain in the ass 1041 forms, which I’m never sure if I got right or not. (Next year- preparer.) It usually comes to something like five bucks for each trust that I have to send in. Well, in addition to the processing and all, last year I got four phone calls from the IRS about one of the official numbers attached to one of the trusts, and they mailed me four or five forms that I had to fill out and send back and all. They definately lost money on me that year just in terms of paying the guy who had to spend a lot of time with me on the phone explaining things in little words.

It’s the fear of the almighty IRS. I know of one friend that had about $200 coming to him. He wanted to just concede the money to save the hassle of filing, but figured he’d get nailed if the IRS started sniffing after not filing a return. Going after the “loss-inducing” audits kept him in line.

The IRS doesn’t really give a shit about the money. The Treasury has more money than any of us can comprehend. They just want to make sure we’re scared enough to keep filing on time.

Given that people with very low income get more money from the government than they pay, there will always be a certain segment of the population that pays an arbitrarily small amount in taxes. I believe that one year while I was a student and working very little, I paid something like $22 in federal taxes. I’m sure it’s not cost effective for the government to process someone who only pays that little.

However, it’s not true that they couldn’t let those people get away with not filing. If you earn less than a certain amount ($4750, right now) you don’t have to file a 1040 at all.

With regard to audits, I had always heard that if your tax liability was less than $1500, the IRS would not pursue it, because it would cost more to audit you than the revenue produced by collecting the tax owed. No cite though, anyone else confirm this?

Well, since the bottom 50% of American taxpayers only pay about 4% of the total federal income tax, it would be quite plausible if collecting from them cost more than it takes in in taxes. It would make a lot more sense to focus on the top wage earners: - the richest 1% of tax payers pay about a third of the total income tax.

The federal income tax is not the only tax the federal government collects. What percentage does the bottem 50% pay out in social security?

In order to avoid a potential nightmare, always file even if you “don’t have to.” Back when I was a very poor student, I didn’t make enough money to have to pay taxes and none were taken out of my paychecks so I didn’t have anything coming to me. I called the IRS and they confirmed that I didn’t have to file. A year later I was sent a form saying that I was being fined $500 for not filing. It’s a long story but it took several letters and phone calls to get it straightened out. Spending 10 minutes filling out a 1040EZ would have been the way to go.

Haj

I’ve worked on a couple of tax systems at the state level. What Duffer said corresponds to what I heard from one woman who specialized in collection of unpaid taxes. Basically, you have to go after deadbeats - it’s what keeps everybody else in line. Spending hundreds of dollars to collect $22 doesn’t seem cost-effective, but it ensures that hundreds of other people that owe $200 will file and pay, because they know that the government will pursue them. In the long term, it works out.

I think this is where credit card companies screw up. Sure, it may not be worth going after credit card fraud for $2000, but now EVERYBODY knows that, under a certain limit, the credit card companies won’t come after you, thus making credit card fraud very tempting. Maybe the CC companies have done studies that say this isn’t so, but it seems counter-intuitive to me. Maybe the difference is that CC companies can pass the cost on to the consumer in higher rates and fees, whereas tax agencies don’t have that option.

Politician: We need to raise taxes on everybody, since some people just aren’t paying their taxes.
Public: Mmm, no thanks. Try again in 4 years?

Well, sort of. The cost of doing an audit and all means that they’d like to clear a thousand bucks from a normal 1040 “go into the IRS with your records” kind of audit. Thus, they have set the computer (and asked the dudes who manually go through the potential audit cases the computer spits out) to more or less look for that. But the real bottom line is more like $100- if they are going to get less than that, they aren’t even supposed to bill you for it*, and they’ll call it off if so. Sometimes this figure is $200.

So yes, if there is an item on your return, and it’s questionable, but it saves you less than $200, you can deduct it safely. Note that I say “questionable” not “fraudulent”.

  • Note that what I am talking about is an AUDIT. Not a “you made a math error on your return” or “you forgot this 1099” notice from the Service Center. Those are not audits- unless a real live person goes through your records and asks you (or your CPA) questions there is no “audit”.

This is all according to my brother, who is an Income Tax pro.