Why doesn't the IRS make a priority of auditing rich folks' returns?

Politics & Elections
21

I assume too, a lot are like the mail I got from Revenue Canada - I simply forgot to include a specific form for an investment account so pretty simple - the computer spits out a notice, they ask me for more money ($C162). Presumably the same with the IRS. Counts as an audit, no doubt, but there is no dispute about it. There are probably a dozen like this for every millionaire pushing the limits of deductibles.

Problem solved, I changed options so the bank sends me a paper form, I won’t have to look through online notices in the bank app for the tax form. (the default) I won’t forget it next year.

As I understand, this relates to capital gains vs. earned income. Funny thing, if you make money by selling things that have appreciated in value like stocks, you pay about 1/4 as tax on appreciation. Guess how the major political donors make a lot of their money? OTOH if the company hands you $40B in stock options (as happened to Elon Musk with Tesla last year) then that’s income, and you pay earned income tax rate (making Musk pretty much the largest ever taxpayer in a single year, about $20B.) Although, to be fair, when your dilemma is what to do about $40B in earned income this year, does it really matter if the government gets half?

22

Not for the IRS.

23

I’m sure the IRS doesn’t consider a mailed request for

I’m not sure what you are saying - do you mean that the IRS doesn’t consider “audits by mail” to be audits for productivity purposes or to determine staffing ? I’m sure they don’t . - but they obviously in general consider them to be audits as they have a whole publication about them, in which they are referred to as “audits” :

The IRS will send a letter informing you that you have been selected for an audit

Steps in the Audit Process

The length of an audit varies and depends on many
factors, including the type of audit.

24

So I’ll get specific off my previous example of Trump deducting $70,000 worth of expenses for his haircuts, presumably because his public image demands that he look good blablabla. It would take me halfway through the next millennium to rack up 70Gs in haircuts but I’m pretty sure the IRS wouldn’t allow me to deduct $700 or even $70 in annual hair-care expenses even if, as a receptionist in a dentist’s office or a salesman for a personal hygiene company, a neat appearance was a requirement for my job. But they seem not to have taken exception to Trump’s 70 G worth of pomade and hair spray. How do they justify that inaction?

25

Yes, there are Audits by mail. They are simple, one issue audits.

But a math correction notice is not an audit.

Now, a missing 1099 can be a sorta “audit by mail” but it depends. However it is not handled by Compliance, and not part of Compliance staffing.

Here is some bad news-

I got the article free, but then when I went back, it hit a $#@! paywall.

26

This gift link should work

27

[Moderating]
I think that this thread has run about as far as it can in FQ. Moving to P&E.

28

Why abandon the thread just as the facts are being given? Look at some of the quotes from that article.

Before Donald J. Trump became president and after, his exceedingly complex and voluminous tax returns came under regular scrutiny by the Internal Revenue Service. The number of agents assigned to the audit team: one.

After he left office, the I.R.S. said it was beefing up the audit team, to three. The tax agency itself acknowledged that it was still overwhelmed by the complexity of Mr. Trump’s finances and the resistance mounted by the former president and his sophisticated army of accountants and lawyers, which included a former I.R.S. chief counsel and raised questions early last year about why even three revenue agents should be assigned to audit him…

“This return has about 400 flow-through returns reported on Schedule E and, since some of these are tiered, report a total of about 500 flow-through returns,” the auditor said.

Underscoring the need for more resources, the memo went on to say that to “do a thorough review of these returns, we would need a team much larger than the current team.”

It’s not simply Trump, of course.

[T] he committee reports released this week highlight how depleted the I.R.S. has become in the last decade, as Republicans starved it of funding. They also show how the agency has become increasingly unable to crack down on wealthy taxpayers who push the legal limits to lower their tax bills and have the means to fend off audits if they get caught. [bolding added]

Note that this is not an opinion piece; it’s a front-page news article. Why is the IRS allowing the rich to amass $7 trillion in unpaid taxes? Republicans.

Republicans have for years accused the I.R.S. of political bias and unfairly targeting conservatives. For that reason, they have fought to cut the agency’s funding or, in some cases, called to abolish it altogether. …

Can we do something? We have, but the Republicans are going to crush it.

The Treasury Department, which oversees the I.R.S., is planning to use some of those [Inflation Reduction Act] funds to hire more auditors who can tackle complicated tax returns. …

[Ted Cruz said] “I think we ought to fight an epic, knock-down, drag-out fight over stopping the Democrats from funding 87,000 new I.R.S. agents to harass and intimidate and persecute Americans and their political enemies.”

This is the answer to the OP. Republicans have been systemically gaming the system for decades. (I’m sure some Democrats have colluded, but nowhere near the same extent.) The IRS could work. It could hire more people to do audits. It could even hire more people to answer phones for ordinary people without tax accountants, which is where most of those new IRS agents are supposed to go. But Republicans don’t want any of that. It makes for a better enemy who is secretly working for their side.

29

I personally would like to see a lot of currently-deductible things made non-deductible. That would streamline the tax code, and produce more revenue without raising the official rates.

But CPA’s, tax lawyers, and tax preparation companies have an interest in retaining the current system.

30

Such as? Give us a list that would not harm the middle class taxpayer, which is pretty screwed by the current (trump) tax code.

31

I think the vast majority of us aren’t able to itemize anymore. With a standard deduction of $25,900 for a couple, you need your mortgage interest + property tax + state and local taxes to exceed that in order to itemize. I don’t come close and haven’t itemized for years.

32

Or medical expenses. As it turns out, that’s been the big issue for me over the last few years. Mainly because my health insurance premium (which is deductible) is horribly high. A few years ago I spent around $25,000 just on medical insurance. (I’ve got it somewhat under control by switching to Obamacare.) Also, I’ve had to spend thousands of dollars on my kid’s braces.

33

Per random googling, the change dropped itemizers from 30.9% to 11.5%. I’m assuming that’s percentage of returns filed.

We max out SALT, at 3.25% APR aren’t paying all that much mortgage interest even with DC home prices, and only itemize now due to charitable donations.
Seems like donations might be ripe for audits.

34

I’m surprised it’s that high a percentage that itemize. I suppose single homeowners might get past the $12,950 standard deduction between mortgage interest, property tax, and state tax. It’s a little tougher for married couples to hit $25,900 unless their property tax and/or income is quite substantial.

35

It’s especially hard because of the limitation on state and local taxes - I could get past the $25,900 if I could deduct all my state and local taxes and my mortgage interest. But I’m limited to $10K in deductions for state and local taxes although I pay around $20K.

36

As @doreen mentions, SALT is capped, so a capped couple* with no other deductions would need $15,900 in mortgage interest to break even itemizing. Which isn’t hard to hit with a new mortgage today. Borrowing $250k will do it whereas it used to be twice that.

*Hellooo marriage penalty

37

OP here. There’s an article in the current New Yorker that proposes some remedies for the IRS’s negligence in going after rich people’s tax returns.

38

In 2021 I had over $35,000 in medical expenses, and we weren’t even particularly sick. Lately, that’s been the key figure in itemizing.

(If you’re wondering, health insurance premiums is a good chunk of that amount.)

39

There is no “negligence” as even your cite states- First, we need to strengthen the Internal Revenue Service so that it has the capacity to hold accountable serial tax avoiders like Trump and to deter would-be imitators.

The IRS did not have the staffing capacity to “go after rich people tax returns.” The GOP spent many years making sure of this as they crippled the IRS with huge budget cuts.

We also know that, between 2010 and 2020, Congress reduced the I.R.S.’s budget by more than twenty per cent in inflation-adjusted terms, the number of people in the agency’s enforcement division fell by almost a third, and the rate at which rich taxpayers were audited dropped by more than two-thirds.

But House G.O.P. members, some of whom want to abolish the I.R.S. entirely, have already indicated their desire to rescind the additional funding. With Democrats controlling the Senate, that proposal has no chance of becoming law, but the threat from Republicans won’t end there. “When the debt ceiling comes up, they could hold up the entire country to reverse the eighty-billion-dollar increase,” Rosenthal warned.

40

First thing the new GOP congress does-

The Republican proposal to eliminate billions of dollars in IRS funding will pile more than $100 billion onto federal deficits, according to a new estimate from Congress’s official budget scorekeeper.

The bill, which is slated to hit the House floor Monday night as the first legislative act of the new GOP majority, would claw back most of the almost $80 billion in new IRS funding provided under the Democrats’ massive climate, health and tax package, which was signed by President Biden last year… The Congressional Budget Office (CBO) estimated Monday that the legislation would cut federal spending by $71 billion, but would reduce tax revenue to the tune of almost $186 billion. The net effect would be a $114 billion increase in deficits over the next decade.