WSJ: IRS can’t find all those wealthy tax cheats

Interesting editorial and not a surprise. Next target sure to be self employed people and small businesses earning $200,000 to $2,000,000. Everyone knows those SOB's are cheating – the IRS is sure of it…

Unlike bank robbers, IRS auditors tend to look where the money isn’t. That’s what happened after the agency started scrutinizing more tax returns from the wealthiest Americans. A new report says increased targeting of these taxpayers was hugely ineffective. The policy, launched in 2020 by former Treasury Secretary Steven Mnuchin, required the IRS to audit 8% of taxpayers each year who earned more than $10 million. To hit that quota, the agency started examining returns with fewer irregularities. The efficiency drop was steep, according to the Treasury Inspector General for Tax Administration

The average dollars assessed per return above $10 million “was nearly six times more productive prior to the 2020 Treasury Directive,” meaning the average examination recovered six times as much in unpaid taxes. Or to put it in terms of IRS productivity, after the policy change the money that auditors assessed per hour from this income group dropped 93%.

Misspent time was inevitable once the criteria were broadened past traditional signs of tax errors or misstatements.

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The Biden Administration has taken one step forward and two backward on audit policy. The Treasury Department stopped following the 8% rule last year, citing poor results. Yet Democrats have set aside $24 billion to boost enforcement, and Secretary Janet Yellen directed that new audits target high earners, without specific criteria to avoid wasteful searches.

Creating audit guidelines is a political pickle, because lawmakers want to recover missing revenue without offending taxpayers. The perennial solution is to focus on high earners, in the same way that Democrats want to raise income taxes with higher top rates and thinner brackets. The theory seems to be that uber-wealthy tax cheats are hiding around every corner, even if the IRS can’t seem to find them.

The best audit guidelines focus on signs of noncompliance. The smart strategy is to minimize the number of law-abiding taxpayers the IRS bothers, and choose those to scrutinize based on irregularities that tend to coincide with underpayment. High earners with bigger tax bills make easier political targets, but it’s a wasteful mistake to audit them merely because they exist.