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January 11, 2006

Love Da Taxes

Over in The New York Times, David Cay Johnston reports:

Tax refunds sought by hundreds of thousands of poor Americans have been frozen and their returns labeled fraudulent, blocking refunds for years to come, the Internal Revenue Service's taxpayer advocate told Congress today.

The taxpayers, whose average income was $13,000, were not told that they were suspected of fraud, the advocate said in her annual report to Congress. The advocate, Nina Olson, said her staff sampled suspected returns and found that, at most, one in five was questionable. [...]

Ms. Olson said the I.R.S. devoted vastly more resources to pursing questionable refunds by the poor, which she said cannot involve more than $9 billion, than to a $100 billion problem with unreported incomes from small businesses that deal only in cash, many of which do not even file tax returns.

Ms. Olson, whose job Congress created eight years ago to argue for the interests of taxpayers, also said the top priority for the tax system must be simplification. She said the tax system is so complex that millions of people have difficulty complying and can get in trouble for subtle mistakes, while those with aggressive advisers can manipulate the system to escape paying taxes they owe.

Once a return is flagged, requests in future tax returns are also frozen for a number of years that the advocate said she is not allowed to disclose because it goes to law enforcement techniques.

Ms. Olson said that 66 percent of those taxpayers who pressed for their refunds were found to be due all the money they sought or even more than they asked for.

As Angelica rightly replies:

Can you imagine if they took this approach to tax-fraud for the rich and superrich? "Hey there, I don't really know if you're guilty of tax evasion, but our computer thingymajig say you might be. Therefore we're going to be holding onto a big chunk of your income until we all get it sorted out whenever, m'kay?"

I have a feeling that wouldn't fly.

No, I don't imagine it would. Meanwhile, all those Masters of the Universe scattered across the upper income brackets are deeply distressed at our how unfair the system is to them. An inability to hide all your assets really ruins a weekend at Martha's Vineyard, you know?

The folks getting screwed by the IRS are not, and never were, the rich. Those bizarre hearings inspired by Frank Luntz's polling and cynically conducted by a power thirsty GOP were straight kabuki theatre. Our system, presently, is massively biased against the poor. We employ error-prone algorithms and punitive measures that wouldn't survive ten seconds amongst a non-marginalized fraction of the society. The GOP, by obfuscating the concept of marginal tax rates, has created a code with no checks against massive inequality and loopholes that make obscene riches all but invisible to tax collectors. Democrats inexplicably slashed taxation on income from wealth and did nothing to reverse the massive slide in government revenues. George W. Bush took the Social Security trust fund filled by the regressive payroll tax and spent it on even-more regressive tax cuts, which'll in turn demand higher taxes later. Social Security, for that matter, could've had its solvency ensured by raising the cap in taxable income, but instead remains in the same "crisis position" that so scared Republicans in January 2005. And the load just gets heavier and heavier on the poor...

But they're the downtrodden, they're used to it. So let's put it on the table: we're all for tax reform. Hell, I'm for truly fundamental tax reform. But some want reform that entrenches the tax code's heavy tilt towards the rich while others want to push the system back towards something roughly approximating equity and progressivism. The question isn't whether or not you want tax reform, but what sort of tax reform you want. And it's a shame that we've not yet had that debate.

January 11, 2006 | Permalink

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Comments

That story makes me so angry the only "reform" I can think of is by torch.

Posted by: Mr Furious | Jan 11, 2006 3:32:38 PM

The "refund" you refer to is really not a refund at all for almost all of those whose income averages $13,000. It is a gift....money that was never paid in, usually from the Earned Income Credit.

Are they due this? Absolutely! However, this credit has been a magnet for abuse since its inception and the numbers are staggering simply because there are many more poor people than rich.

In a February 28, 2002 report on its study of 1999 EIC claims IRS said that of the estimated 31.3 billion in EIC claims between 9.7 and 11.1 billion was overclaimed (30.9 to 35.5%) www.gao.gov/cgi-bin/getrpt?GAO-02-449

That seems like an awful lot and more than the author has claimed in this article.

Posted by: Fred Jones | Jan 11, 2006 4:03:25 PM

And what's the estimate of illegally unreported or hidden taxes due from people making over $100k/year? $100 billion? $300 billion? Somewhere in there, compared to the 11.1 billion in EITC fraud- but what's an order of magnitude between friends?

Posted by: SP | Jan 11, 2006 4:14:52 PM

Simplifying the tax code is definitly a good idea, with either a flat tax or a transaction tax or some combo of the two....kudos Ezra.

Posted by: Steve Mudge | Jan 11, 2006 4:17:51 PM

As my father says, sadly a flat tax would probably make the US tax system fairer than it currently is.

Posted by: Joel W | Jan 11, 2006 4:23:55 PM

...but what's an order of magnitude between friends?

There is no reason why they should not attempt to catch *ALL* who cheat. A thief is a thief.

Why would anyone ask that poorer thieves be spared policing?

Posted by: Fred Jones | Jan 11, 2006 4:40:53 PM

Normally, I hope for the best, but at this point, I wouldn't mind seeing all the Red Tory nightmares out there come true.

Posted by: wcw | Jan 11, 2006 4:41:04 PM

$340 billion is what the upper class cheats cost us. And Fred's furnished another excellent example of linking a report he did not read. First, the program the GAO is examining is the same one in this article, the one that's catching all the false positives. And what do the GAO say about it?

"While the recertification program provides a vehicle for combating EIC noncompliance, we believe that the program unnecessarily burdens taxpayers while not ensuring that IRS obtains a reasonable evidentiary basis for determining whether recertification applicants should be granted the EIC. As a consequence, legitimate taxpayers may be discouraged from claiming a credit to which they are entitled or IRS may make poorly supported decisions in allowing or disallowing the credit."

As for the overclaim, those are IRS figures which, as the article points out, are apparently wrong around two-thirds of the time.

Facts matter.

Posted by: Ezra | Jan 11, 2006 4:58:50 PM

There is no reason why they should not attempt to catch *ALL* who cheat. A thief is a thief.

Why would anyone ask that poorer thieves be spared policing?

Strawman. No one's asking that. But there's a difference between "policing," your imaginary version of what happened, and "assuming a crime has been committed after almost no investigation, but then not telling the accused about it so they don't know how they can get what they deserve," which is what the quoted material looks like.

And I'm just posting in a few minutes at work so forgive me for not checking, but you say

In a February 28, 2002 report on its study of 1999 EIC claims IRS said that of the estimated 31.3 billion in EIC claims between 9.7 and 11.1 billion was overclaimed (30.9 to 35.5%) ... That seems like an awful lot and more than the author has claimed in this article.

Looks like an insinuation of bad faith against the reporter, right? But the article said that 66% of these people were due what they asked for or more. Therefore, roughly 34% were not. Oh, look, that's right around the percentage you list. Huh, what a coincidence.

Posted by: Cyrus | Jan 11, 2006 5:03:12 PM

Cyrus -- you're missing the point. The reporter looked into the data Fred's referencing and found 66% deserved full benefits or more and 34% were in the wrong. So we're dealing with 34% of 34%, or 12%.

Posted by: Ezra | Jan 11, 2006 5:12:39 PM

One of the big problems involving tax reform is that the right has, through a combination of ignorance and dishonesty, created a lot of confusion. Look at how they insist that the different marginal rates make the system complex when that in fact has nothing to do with the problem. We know why they do this--to create a favorable turf for their agenda--but until we stop them, I can't imagine anything positive being done.

Posted by: Brian | Jan 11, 2006 5:16:44 PM

As my father says, sadly a flat tax would probably make the US tax system fairer than it currently is.

No, it wouldn't. Saying "let's tax everybody at the same rate" is one kettle of fish; deciding what you're going to tax is another. A flat tax rate isn't going to be fair if dividend income isn't going to be taxed, for example.

Posted by: chdb | Jan 11, 2006 6:25:18 PM

A flat tax rate isn't going to be fair if dividend income isn't going to be taxed, for example.

Steve Forbes, who couldn't sharpen a pencil without written directions, still managed to figure this out. Which was why it was the centerpiece of his tax 'reform' plan....

Posted by: Davis X. Machina | Jan 11, 2006 10:14:26 PM

"As Angelica rightly replies: "

Well not exactly. Taking the approach that one wrong -- arbitrarily blocking low income refunds -- is somehow made better or worse by committing a similar wrong against someone else is kind of disgusting.

Posted by: m | Jan 12, 2006 12:17:26 AM

The answer to this is: NATIONWIDE STRIKES all across society. Every Friday, just don't do anything. Assemble peacefully in a public place and network. A Nationasl Day of Protest Every Friday.

Pass it on and make it happen, bloggers. We're running out of options.

If we are going to be treated like serfs in a banana republic, then we'll adopt banana republic methods for responding to that treatment.

Posted by: have skunk | Jan 12, 2006 1:02:09 AM

Taking the approach that one wrong -- arbitrarily blocking low income refunds -- is somehow made better or worse by committing a similar wrong against someone else is kind of disgusting.

In which 'm' misses the point entirely.

One more time in large letters: the point is not to advocate that the wealthy have their refunds held up or their incomes garnished just on principle, but to point out that if it were the wealthy affected instead of the working poor, it never would have happened.

Posted by: paperwight | Jan 12, 2006 10:05:18 AM

Why would anyone ask that poorer thieves be spared policing?

Goes to allocation of resources (I don't see you advocating an increase in the IRS's enforcement budget, do I...?) Shouldn't they concentrate their efforts in the areas that yield the greatest dollar returns?

Posted by: Thlayli | Jan 12, 2006 11:27:54 AM

Thlayli, dollar returns are great, but have you ever seen the crestfallen look on the face of a single mother who's just found out she won't be getting her expected refund? You just can't put a dollar value on that! It's priceless! [/snark]

Posted by: TJ | Jan 12, 2006 11:49:38 AM

Shouldn't they concentrate their efforts in the areas that yield the greatest dollar returns?

I would imagine that catching poor tax cheats is much, much easier than catching rich tax cheats. All they do is simply lie on their returns. Sophisticated rich tax cheats create backup evidence. Couple that with the sheer number of poor tax cheats as compared to the rich and the IRS may very well be currently concentrating their efforts in the areas that will yield the greatest dollar revenue. That was your test, was it not?

Posted by: Fred Jones | Jan 12, 2006 12:02:11 PM

Mr. Jones is, as usual, wrong on the facts (unless one spends zero dollars on enforcement against the working poor, like the IRS seems to be doing now), but let's leave that aside for a moment. Look carefully at his underlying ideology, which is in fact George Bush's position:

President Bush has come up with a novel argument in defense of his upward-tilted tax cuts. It boils down to this: No sense trying to raise taxes on the rich as my opponent wants. The rich will just hire more "lawyers and accountants," and you ordinary folks will end up paying the bill for them. Or, as he put it in Lima, Ohio, last month, "The rich dodge, and you get stuck with the bill."

Posted by: paperwight | Jan 12, 2006 12:41:56 PM

The bigger issue is why would anyone think that the IRS does not try to utilize its resouces to maximize revenue already? The EIC cheats are the 'low hanging fruit' and the dollar for dollar return for their efforts will be much higher than trying to catch those in cash businesses, nonfilers and others that require long and drawn out in-depth investigation.

I guess my point is auditing EIC claims is an easy 9 billion.

Posted by: Fred Jones | Jan 12, 2006 12:54:11 PM

Cyrus -- you're missing the point. The reporter looked into the data Fred's referencing and found 66% deserved full benefits or more and 34% were in the wrong. So we're dealing with 34% of 34%, or 12%.

Sorry. I should read blogs at work less anyway...

Posted by: Cyrus | Jan 12, 2006 1:43:10 PM

I admit that the law is the law and that everyone is capable. But when it comes to the small amount of money, money that means alot more to that individual than it would to your or I, there simply is no reasonable justification for the practice. On an individual basis these methods further entrench the unfairness between rich and poor.

Posted by: Adrock | Jan 12, 2006 1:53:37 PM

...there simply is no reasonable justification for the practice.

It is a more efficient use of IRS resources. The problem is that every issue you discuss you paint as a class war. The IRS is less involved in class warfare and more interested in efficient use of resources and maximizing collected revenue.

Posted by: Fred Jones | Jan 12, 2006 3:15:31 PM

It is a more efficient use of IRS resources. The problem is that every issue you discuss you paint as a class war. The IRS is less involved in class warfare and more interested in efficient use of resources and maximizing collected revenue.

From the Times article:
"Ms. Olson said it was unfair, and a waste of resources, to withhold refunds from poor people when at most one in five of them appeared not to be due refunds.

She also said that the I.R.S. told her that its program had protected $2.1 billion of revenue. But she said this number was misleading.

Just two refunds, from a scheme run by prisoners, accounted to $1.8 billion of the total, she said, citing testimony to Congress by Nancy Jardini, chief of the I.R.S. criminal division."

So this super efficient program found $300 million in supposed fraud. Given that only 34% was actually fraud this means they saved $100 million while not even looking at the estimated $100 billion in unreported income. Efficient means something different to me.

Posted by: Col Bat Guano | Jan 12, 2006 5:03:28 PM

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