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Who Will Be Targeted by the IRS When Biden Turns the Dogs Loose?

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Published on: May 13, 2022

Hint: It won’t be the top 1 percent.

One of the key elements of President Biden’s failed Build Back Better plan was to spend $80 billion over the next ten years on the Internal Revenue Service: a sum that would have nearly doubled the agency’s annual budget. While that plan eventually died, the goal to significantly beef up the IRS hasn’t died with it.

In 2023 the agency will spend about $14.1 billion on all functions. Of that, just $3.684 billion will be dedicated to taxpayer services, while $6.274 billion will be spent on enforcement. That includes audits, investigations, and collection actions. The agency will hire another 3,800 enforcement officers — auditors, in particular — which nears a 10 percent increase from 2021.

The Treasury Department claims that the increase in “robust” enforcement activity will not affect anyone earning less than $400,000 per year.

But how likely is this? Whatever Treasury may say, it is not unreasonable to suspect that a significant proportion of this extra enforcement will target small-business owners and low-income taxpayers.

How can this be? Isn’t it the wealthiest who are doing the cheating? That’s certainly what the IRS would have you believe; if it were true, the thinking goes, the broader public would likely be more willing to get on board with the idea of turning the dogs loose on the richest 1 percent who apparently aren’t paying their “fair share.”

The truth, however, is that small-business owners and self-employed people will always be key targets of IRS enforcement, enhanced or otherwise. That is because the IRS believes that small-business owners cheat on their taxes — virtually across the board. In the IRS’s opinion, small businesses are the primary contributors to the so-called tax gap: the estimated difference between the tax legally owed and what is actually paid. Estimates place that figure at about $390 billion annually.

In September 2019, the IRS released a research report in which it claimed that almost half of the tax gap is attributable to self-employed people and small corporations, even though they account for about only 15 percent of all tax returns filed. Though the report was drafted under the Trump administration, this remains the IRS’s philosophy, because it was written by the career bureaucrats who populate federal-government agencies and rarely (if ever) change with administrations. Proof of this lies in a September 2021 article written by the Treasury Department’s Natasha Sarin.

In that article, Ms. Sarin argued that “about half of the individual income tax gap accrues to income streams from proprietorships, partnerships, and S-corporations, where there is either little or no information available to the IRS to verify the veracity of tax filings.” The plain implication is that unless the IRS has third-party information to verify the claims made by self-employed people, such people will — and do — systematically cheat on their tax returns. This was the thinking behind the administration’s recent push for bank-reporting of any account with net flows (i.e., in and out transactions) of at least $600 in a year.

According to the IRS’s 2019 research report, the underreporting of income by small businesses comes in a number of ways — including by deliberately overstating deductions, intentionally failing to report all business income, willfully failing to file the laundry list of forms and reports the tax code requires, and knowingly skirting the Byzantine employment-tax rules heaped on business owners.

Because of this, it seems clear that the IRS intends to wage an all-out war against business owners. In a September 26, 2019 statement the IRS made it perfectly clear that it would “vigorously pursue those who are not compliant.” IRS Commissioner Chuck Rettig personally piled on, saying that the IRS intends to “focus on those who skirt their responsibilities.” According to the IRS, that is small businesses, not the richest 1 percent, since that’s where the gap is found.

In light of Treasury’s claim that the tax gap is attributable to “proprietorships, partnerships, and S-corporations,” it is misleading to suggest that self-employed individuals operating under one of these entity forms will not be included among those targeted for additional enforcement action. A large majority of self-employed people operate under one of these entities, and a large majority of them earn well under $400,000 annually.

Now let’s turn our attention to the low-income side of the ledger. Why would the IRS target low-income citizens for audit and enforcement action? After all, they are “low-income.” What’s to be gained by chasing financial ghosts?

Low-income taxpayers, as it turns out, tend to take advantage of the “refundable credits” that are built into the tax code. A refundable credit is one that not only reduces your tax liability but actually creates a refund of money never paid into the government in the first place. The best example of this is the earned-income tax credit (EITC). The EITC and all refundable credits are actually welfare programs, administered by the IRS, designed to subsidize low-income citizens.

The list of refundable credits is already long and getting longer, particularly in light of the additional-child tax credit, which is most certainly the foundation for a scheme of “universal basic income.”

The sad reality is that I believe the EITC might already be the No. 1 area of fraud in our tax system. And why wouldn’t it be? Those who qualify for the credit — low-income people — get free money from the government. The U.S. Government Accountability Office reports that improper government payments to individuals are high and getting higher. They went from $151 billion in FY 2018 to $175 billion just one year later.

Perhaps surprising to many people, improper EITC payments are third on the list of federal-government programs that generate improper (or fraudulent) payments, behind only Medicare and Medicaid fraud. Indeed, nearly 10 percent of all bogus payments by the federal government in FY 2019 were attributable to the EITC. See the chart here, detailing the improper federal-payment estimates for 2019.

This is why the IRS aggressively audits tax returns that claim EITC credits. In fact, according to a new report by the Treasury Inspector General for Tax Administration (TIGTA), EITC audits have accounted for “almost 31% of all IRS audits in the past ten years.” The EITC is currently responsible for an estimated $27 billion in lost revenue, or 11 percent of the individual-tax gap.

What’s more, the Office of Management and Budget has labeled the EITC as a “high risk” program, subject to reporting by Treasury in its annual Agency Financial Report. According to TIGTA, the IRS estimates that 23.5 percent of all EITC payments made in 2022 were issued improperly.

What do you think will happen to the amount of improper payments issued by the government in light of the massive increase in “hand-outs” in recent years?

Make no mistake about this. The IRS is going to chase the money. And as far as it’s concerned, the majority of cheating occurs among small-business owners and self-employed persons, alongside low-income people claiming bogus refundable credits. That is exactly who the IRS will target going forward.

If you support the ongoing increases in IRS spending — and the army of enforcement agents that goes with it — because you believe that the agency is only going after the rich, wake up. There are not enough rich people out there to make a difference. The IRS is going after Jane and Joe America, because that’s where the money is.

Article posted with permission from Dan Pilla

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