6 ms·

They ignore much larger sums. The real reason they’re targeted is that, quite simply, they’re unable to fight back. It’s the equivalent of searching for your ke

by moomin 4y ago

They ignore much larger sums. The real reason they’re targeted is that, quite simply, they’re unable to fight back. It’s the equivalent of searching for your keys under the streetlight.

AnimalMuppet 4y ago
> They ignore much larger sums. Source? What category of stuff the IRS ignores adds up to more than $20 billion?
- moralestapia 4y ago
  Bit of a tangent but, why $20BUSD?
  - thrdbndndn 4y ago
    >EITC errors/fraud cost the public purse $10-20bn a year
    - moralestapia 4y ago
      Oh that's right, my mind wandered a bit :l
  - NovemberWhiskey 4y ago
    $20bn is the estimated annual cost of fraudulent or otherwise improper Earned Income Tax Credits, which is the primary audit scope for low-income tax payers.
- ribosometronome 4y ago
  https://www.crfb.org/blogs/primer-understanding-tax-gap https://www.crfb.org/blogs/primer-understanding-tax-gap The IRS estimates there's a net tax gap of $554 billion in 2019. They break it down into 5 categories with values from 2011-2013 that all are over 20 billion each: underreported income, over/misreported adjustments, underpayment, non-filing, and other underreporting. They note that their 2011-2013 estimate failed to include underreporting of offshore wealth and wealth going through pass through entities, which resulted in a tax gap of $33 billion per year to the 2011-2013 estimate and 46 billion for 2019.
- wizofaus 4y ago
  Given the total collected is over 4 trillion it's not hard to imagine other categories worth far more than 20 billion.
lostcolony 4y ago
They don't ignore much larger sums; larger sums are much harder to automate detection of. So with the limited amount of manpower they have, far fewer are identified. They can send a letter asking for documentation for everything the automated system flags. The automated system detects "simple" cases at a far higher confidence ratio, which tends to be lower income. Once you get upper income, with all manner of complicated itemized deductions, the confidence of the automated system is much lower, and the effort to ask for appropriate documentation, and verify it, is much higher, for a much lower expectation of return (since, again, low confidence from the system).
- LorenPechtel 4y ago
  And the rich guy probably has a CPA filing their taxes. It's quite unlikely there will be anything in there that's easily detected.
  - ghaff 4y ago
    Or that is a flat-out mistake. You're right that wealthier people probably aren't going to commit obvious fraud like "forgetting" a 1099. But, assuming they are not deliberately committing fraud, their CPA will probably not make any obvious errors either.
    - mindslight 4y ago
      I wouldn't be so sure about that. I just got a letter from the IRS pointing out an error in an amended return my CPA had filed, presumably with the help of software. They tallied total taxable income to a nonzero amount, but then put a zero for the tax due on that amount. I missed it on my own review because it was one of many returns I had to file.
      - ghaff 4y ago
        Hence probably. I have no doubt CPAs like every professional including developers make mistakes. Although I assume they're probably mostly obvious one which can be corrected fairly easily. I'm also sure there are outliers. >I missed it on my own review because it was one of many returns I had to file. Honestly, I look through my returns but they're way past the point where I could find most errors even though my finances aren't especially complex.
marwatk 4y ago
This is addressed in the article: > A critical limitation in the IRS’s ability to audit millionaires is the availability of IRS revenue agents. Only this class of auditors, given sufficient training and experience, are qualified to examine complex tax returns – the types of returns typically filed by high-income individuals and large-scale businesses. > With severe budget constraints, IRS has tended to trade off the replacement of revenue agents with hiring more tax examiners. These certainly are paid less, but they are also less knowledgeable. While revenue agents used to outnumber tax examiners, this has slowly shifted over time.
- deleted 4y ago
  [deleted]
- wongarsu 4y ago
  I'd be interesting to see how the ratio of revenue agents to tax examiners would shift if the IRS would get a portion of discovered tax fraud back into their budget.
  - syspec 4y ago
    There's no way that's a good idea. See police departments + (civil asset forfeiture and small town speed traps)
  - TAForObvReasons 4y ago
    Looked into this years ago in a semi-related discussion: https://news.ycombinator.com/item?id=21874358 https://news.ycombinator.com/item?id=21874358 https://www.finance.senate.gov/ranking-members-news/irs-budget-cut-translates-to-huge-tax-loss https://www.finance.senate.gov/ranking-members-news/irs-budg... > IRS Research Division estimates in the 2003 GAO report, however, placed returns for activities such as tax enforcement at more than ten – and in some cases more than 20 – dollars collected for every dollar spent. Phone calls to follow up on tax debts owed were estimated to return 13 dollars for every dollar spent. Audits by mail returned as much as 11 dollars for every dollar spent. Using the overall rate of a four to one return, this year’s $100 million budget cut translates to a $400 million loss. Imagine 20 dollars per dollar spent, that's the type of unicorn investment that basically every VC hunts for.
JumpCrisscross 4y ago
> they ignore much larger sums Not really [1]. When you make more than $500k, your audit rate doubles from the national average of 0.25%. It doubles again at $1mm and more than doubles once more at $5mm. EITC-only returns are audited around the frequency (0.77%) of someone making $500k to $1mm. I'm not sure why $1 to 25k is audited at the same frequency as $500k to $1mm. But given "from fiscal years 2010 to 2021, the majority of the additional taxes IRS recommended from audits came from taxpayers with incomes below $200,000" and that "EITC audits are primarily pre-refund audits and are conducted through correspondence," it seems--very roughly--closer to the optimum than the headline suggests. [1] https://www.gao.gov/products/gao-22-104960 https://www.gao.gov/products/gao-22-104960
- koheripbal 4y ago
  It's important to remember that an "EITC correction" != "audit", despite the parent assuming all audits are equal. Correcting a simple error might never even involve a human IRS auditor. It's as simple as an automated letter going out and instructing someone to correct an obvious mistake (this happened to me). Never spoke to anyone - just submitted the correction. There should be no limit to audits that are nearly-automated, regardless of whom they target. Audits that require an investigator are far more effort and those investigative resources need to be proportioned by the expected return on investment. ...and while that will likely tend more frequently to the rich, it shouldn't necessarily be so.
  - NovemberWhiskey 4y ago
    https://www.taxaudit.com/irs-letters/irs-letter-cp75a-sample-1 https://www.taxaudit.com/irs-letters/irs-letter-cp75a-sample... This is what a typical audit of EITC looks like. It is literally "send us some forms and some proof like a birth certificate showing you're the parent of the child you're claiming".
  - int_19h 4y ago
    If it's so automated, why require people to submit tax returns at all? Just calculate everything and send them the breakdown along with the check.
bryanrasmussen 4y ago
no, the searching for the keys under the streetlight joke is funny because you will never find the keys under the streetlight no matter how nice it might be to search for them with a good light source, whereas you will be able to relatively easy find small sums of money and make people it from the poor families under discussion here.
- worik 4y ago
  > you will never find the keys under the streetlight That is a strong statement! It is not true, some times that is where they are. Actually if it is the only place you could find them (the rest of the street is too dark, you do not have a torch to see or fingers to feel....) it is an optimal, albeit dismal, strategy Loving digression.....
  - bryanrasmussen 4y ago
    evidently you used the phrase without familiarity with its origin? https://en.wikipedia.org/wiki/Streetlight_effect https://en.wikipedia.org/wiki/Streetlight_effect >A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys and they both look under the streetlight together. After a few minutes the policeman asks if he is sure he lost them here, and the drunk replies, no, and that he lost them in the park. The policeman asks why he is searching here, and the drunk replies, "this is where the light is". Hence, the drunk and the policeman are never going to find the keys under the streetlamp because they were lost in the park.
NovemberWhiskey 4y ago
No; it's simpler than that. Tax fraud doesn't distribute by income; it distributes by nature of income, and the ease with which that income is validated. Some really large proportion of Americans are basically W-2 filers taking the standard deduction. These Americans have no opportunity to evade taxes. Most income tax fraud probably takes place in the area of passthrough businesses and other areas where tax verification isn't simply a problem of reconciling what employer A (or brokerage B, for dividends and stock sales, or bank C, for interest) said they paid to person P with what person P reported on their return. TL;DR - it's hard to execute a fraud when the IRS already has the corresponding 1099s on-file for you.
- Kye 4y ago
  This will probably change with the 1099k requirement dropping to $600 nationwide. Or it'll further overwhelm the IRS.
- prepend 4y ago
  > These Americans have no opportunity to evade taxes. I think there’s a lot of opportunity related to kids. Deductions and credits vary and can be mistakenly or willfully claimed.
gist 4y ago
> The real reason they’re targeted is that, quite simply, they’re unable to fight back. I think there is a misunderstanding of what an 'audit' means. It can be as simple as a letter from the IRS (after their analysis alerts them) asking that certain documents be provided to support a deduction or otherwise. The IRS is not conducting large scale audits on people with low incomes it would not be feasible there is not enough to even dig into. What the government (in this particular case for the EITC) should be easy for the taxpayer to reply with info needed to dispute the claim.
- biomcgary 4y ago
  I got a tax bill for more than a hundred thousand dollars when I sold my primary residence a few years ago. No taxes were actually owed due to the primary residence carve out for capital gains. The sale had been reported to the IRS by a couple different entities (realtor and title company, IIRC) with a few dollar discrepancy, so the transaction was not merged, even though they for the same address (and single family home). I wrote the IRS a nice letter and they eventually replied that they were closing the case. Sometimes "unpaid" taxes are due to limitations of the IRS, which has historically had very legacy software (not sure if that has been fixed recently).

by moomin 4y ago

They ignore much larger sums. The real reason they’re targeted is that, quite simply, they’re unable to fight back. It’s the equivalent of searching for your keys under the streetlight.

AnimalMuppet 4y ago

> They ignore much larger sums. Source? What category of stuff the IRS ignores adds up to more than $20 billion?

moralestapia 4y ago
Bit of a tangent but, why $20BUSD?
- thrdbndndn 4y ago
  >EITC errors/fraud cost the public purse $10-20bn a year
  - moralestapia 4y ago
    Oh that's right, my mind wandered a bit :l
- NovemberWhiskey 4y ago
  $20bn is the estimated annual cost of fraudulent or otherwise improper Earned Income Tax Credits, which is the primary audit scope for low-income tax payers.
ribosometronome 4y ago
https://www.crfb.org/blogs/primer-understanding-tax-gap https://www.crfb.org/blogs/primer-understanding-tax-gap The IRS estimates there's a net tax gap of $554 billion in 2019. They break it down into 5 categories with values from 2011-2013 that all are over 20 billion each: underreported income, over/misreported adjustments, underpayment, non-filing, and other underreporting. They note that their 2011-2013 estimate failed to include underreporting of offshore wealth and wealth going through pass through entities, which resulted in a tax gap of $33 billion per year to the 2011-2013 estimate and 46 billion for 2019.
wizofaus 4y ago
Given the total collected is over 4 trillion it's not hard to imagine other categories worth far more than 20 billion.

lostcolony 4y ago

They don't ignore much larger sums; larger sums are much harder to automate detection of. So with the limited amount of manpower they have, far fewer are identified. They can send a letter asking for documentation for everything the automated system flags. The automated system detects "simple" cases at a far higher confidence ratio, which tends to be lower income. Once you get upper income, with all manner of complicated itemized deductions, the confidence of the automated system is much lower, and the effort to ask for appropriate documentation, and verify it, is much higher, for a much lower expectation of return (since, again, low confidence from the system).

LorenPechtel 4y ago
And the rich guy probably has a CPA filing their taxes. It's quite unlikely there will be anything in there that's easily detected.
- ghaff 4y ago
  Or that is a flat-out mistake. You're right that wealthier people probably aren't going to commit obvious fraud like "forgetting" a 1099. But, assuming they are not deliberately committing fraud, their CPA will probably not make any obvious errors either.
  - mindslight 4y ago
    I wouldn't be so sure about that. I just got a letter from the IRS pointing out an error in an amended return my CPA had filed, presumably with the help of software. They tallied total taxable income to a nonzero amount, but then put a zero for the tax due on that amount. I missed it on my own review because it was one of many returns I had to file.
    - ghaff 4y ago
      Hence probably. I have no doubt CPAs like every professional including developers make mistakes. Although I assume they're probably mostly obvious one which can be corrected fairly easily. I'm also sure there are outliers. >I missed it on my own review because it was one of many returns I had to file. Honestly, I look through my returns but they're way past the point where I could find most errors even though my finances aren't especially complex.

marwatk 4y ago

This is addressed in the article: > A critical limitation in the IRS’s ability to audit millionaires is the availability of IRS revenue agents. Only this class of auditors, given sufficient training and experience, are qualified to examine complex tax returns – the types of returns typically filed by high-income individuals and large-scale businesses. > With severe budget constraints, IRS has tended to trade off the replacement of revenue agents with hiring more tax examiners. These certainly are paid less, but they are also less knowledgeable. While revenue agents used to outnumber tax examiners, this has slowly shifted over time.

deleted 4y ago
[deleted]
wongarsu 4y ago
I'd be interesting to see how the ratio of revenue agents to tax examiners would shift if the IRS would get a portion of discovered tax fraud back into their budget.
- syspec 4y ago
  There's no way that's a good idea. See police departments + (civil asset forfeiture and small town speed traps)
- TAForObvReasons 4y ago
  Looked into this years ago in a semi-related discussion: https://news.ycombinator.com/item?id=21874358 https://news.ycombinator.com/item?id=21874358 https://www.finance.senate.gov/ranking-members-news/irs-budget-cut-translates-to-huge-tax-loss https://www.finance.senate.gov/ranking-members-news/irs-budg... > IRS Research Division estimates in the 2003 GAO report, however, placed returns for activities such as tax enforcement at more than ten – and in some cases more than 20 – dollars collected for every dollar spent. Phone calls to follow up on tax debts owed were estimated to return 13 dollars for every dollar spent. Audits by mail returned as much as 11 dollars for every dollar spent. Using the overall rate of a four to one return, this year’s $100 million budget cut translates to a $400 million loss. Imagine 20 dollars per dollar spent, that's the type of unicorn investment that basically every VC hunts for.

JumpCrisscross 4y ago

> they ignore much larger sums Not really [1]. When you make more than $500k, your audit rate doubles from the national average of 0.25%. It doubles again at $1mm and more than doubles once more at $5mm. EITC-only returns are audited around the frequency (0.77%) of someone making $500k to $1mm. I'm not sure why $1 to 25k is audited at the same frequency as $500k to $1mm. But given "from fiscal years 2010 to 2021, the majority of the additional taxes IRS recommended from audits came from taxpayers with incomes below $200,000" and that "EITC audits are primarily pre-refund audits and are conducted through correspondence," it seems--very roughly--closer to the optimum than the headline suggests. [1] https://www.gao.gov/products/gao-22-104960 https://www.gao.gov/products/gao-22-104960

koheripbal 4y ago
It's important to remember that an "EITC correction" != "audit", despite the parent assuming all audits are equal. Correcting a simple error might never even involve a human IRS auditor. It's as simple as an automated letter going out and instructing someone to correct an obvious mistake (this happened to me). Never spoke to anyone - just submitted the correction. There should be no limit to audits that are nearly-automated, regardless of whom they target. Audits that require an investigator are far more effort and those investigative resources need to be proportioned by the expected return on investment. ...and while that will likely tend more frequently to the rich, it shouldn't necessarily be so.
- NovemberWhiskey 4y ago
  https://www.taxaudit.com/irs-letters/irs-letter-cp75a-sample-1 https://www.taxaudit.com/irs-letters/irs-letter-cp75a-sample... This is what a typical audit of EITC looks like. It is literally "send us some forms and some proof like a birth certificate showing you're the parent of the child you're claiming".
- int_19h 4y ago
  If it's so automated, why require people to submit tax returns at all? Just calculate everything and send them the breakdown along with the check.

bryanrasmussen 4y ago

no, the searching for the keys under the streetlight joke is funny because you will never find the keys under the streetlight no matter how nice it might be to search for them with a good light source, whereas you will be able to relatively easy find small sums of money and make people it from the poor families under discussion here.

worik 4y ago
> you will never find the keys under the streetlight That is a strong statement! It is not true, some times that is where they are. Actually if it is the only place you could find them (the rest of the street is too dark, you do not have a torch to see or fingers to feel....) it is an optimal, albeit dismal, strategy Loving digression.....
- bryanrasmussen 4y ago
  evidently you used the phrase without familiarity with its origin? https://en.wikipedia.org/wiki/Streetlight_effect https://en.wikipedia.org/wiki/Streetlight_effect >A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys and they both look under the streetlight together. After a few minutes the policeman asks if he is sure he lost them here, and the drunk replies, no, and that he lost them in the park. The policeman asks why he is searching here, and the drunk replies, "this is where the light is". Hence, the drunk and the policeman are never going to find the keys under the streetlamp because they were lost in the park.

NovemberWhiskey 4y ago

No; it's simpler than that. Tax fraud doesn't distribute by income; it distributes by nature of income, and the ease with which that income is validated. Some really large proportion of Americans are basically W-2 filers taking the standard deduction. These Americans have no opportunity to evade taxes. Most income tax fraud probably takes place in the area of passthrough businesses and other areas where tax verification isn't simply a problem of reconciling what employer A (or brokerage B, for dividends and stock sales, or bank C, for interest) said they paid to person P with what person P reported on their return. TL;DR - it's hard to execute a fraud when the IRS already has the corresponding 1099s on-file for you.

Kye 4y ago
This will probably change with the 1099k requirement dropping to $600 nationwide. Or it'll further overwhelm the IRS.
prepend 4y ago
> These Americans have no opportunity to evade taxes. I think there’s a lot of opportunity related to kids. Deductions and credits vary and can be mistakenly or willfully claimed.

gist 4y ago

> The real reason they’re targeted is that, quite simply, they’re unable to fight back. I think there is a misunderstanding of what an 'audit' means. It can be as simple as a letter from the IRS (after their analysis alerts them) asking that certain documents be provided to support a deduction or otherwise. The IRS is not conducting large scale audits on people with low incomes it would not be feasible there is not enough to even dig into. What the government (in this particular case for the EITC) should be easy for the taxpayer to reply with info needed to dispute the claim.

biomcgary 4y ago
I got a tax bill for more than a hundred thousand dollars when I sold my primary residence a few years ago. No taxes were actually owed due to the primary residence carve out for capital gains. The sale had been reported to the IRS by a couple different entities (realtor and title company, IIRC) with a few dollar discrepancy, so the transaction was not merged, even though they for the same address (and single family home). I wrote the IRS a nice letter and they eventually replied that they were closing the case. Sometimes "unpaid" taxes are due to limitations of the IRS, which has historically had very legacy software (not sure if that has been fixed recently).