IRS Math: $600 Million = $4 Billion

A few years back, we argued that Americans should want more IRS audits, not fewer. “Still, unless you are personally cheating by one-fifth or more, you should be mad at the I.R.S. — not because it’s too vigilant, but because it’s not nearly vigilant enough,” we wrote. “Why should you pay your fair share when the agency lets a few hundred billion dollars of other people’s money go uncollected every year?” Now, the IRS may be doing even fewer audits, thanks to political efforts to cut the agency’s budget. In fact, “IRS Commissioner Doug Shulman told the committee Tuesday that the $600 million cut in this year’s budget would result in the IRS collecting $4 billion less through tax enforcement programs.” On the other hand, it will make tax cheating a bit more attractive. (HT: Meir Lindenbaum)


Trevor L

Wow, way to not point out that Pres. Obama and the Democrats actually want to increase the IRS's budget, but the Republicans are trying to cut the budget.

Jeremy Cloud

You have only quoted the IRS Commissioner about this. Nice perspective. Imagine telling a marketing firm that you are cutting back on advertising and they will tell you you'll lose money on a net basis. It's axiomatic and not revealing. The point is the IRS consumes countless hours and dollars every year from the taxpayers. Frankly, I'm happy they have less money to hassle honest tax payers every year, even if it means some criminals get away with paying less.

Ryan K

Jeremy would be an interesting case study. He is well-intentioned in eliminating something to close a budgetary gap, but is instead creating a condition that will directly lead to a larger budgetary gap. Why would an "honest tax payer" favor a policy that encourages dishonest behavior? Maybe its not a 6x return on investment, but even if it were half that, doesn't it still make economic sense? Where is the utility being generated in this scenario?

Brian Hill

Or we could simplify the tax code so THERE ARE NOT so many ways to cheat

Matt

I think you might be confusing tax avoidance and tax evasion. A simpler tax system would reduce the former while audits generally target the latter.

Dan Marcin

Well, you're measuring the administrative cost to the IRS, but you're not mentioning the compliance cost for the taxpayers. So this might actually be social welfare maximizing.

Malvolio

You're comparing apples and oranges. The $600 million is money spent. It's gone -- shattered to pieces, or poured into the stratosphere, or sank in the depths of the sea, in Orwell's memorable formulation -- and it's not coming back. The $4 billion, on the other hand, isn't value created. It's just money transferred from one pocket (mine) to another (the government's), and according to the IRS, just incentivizing that transfer costs 15%.

Worse, the process of an audit is always grueling and stressful, even for someone who isn't cheating on his taxes. That's a real cost. Even at its best, a system of frequent audits just shifts the burden from the honest to a combination of the honest and the timid. I suppose that is something of an improvement.

Overall, I don't see why the actual allocation of costs (including taxes paid and audits endured) is automatically or inherently better in a frequent-audit system than in an infrequent-audit system.

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Alex

Not really. The $600 million largely goes to pay IRS employees and contractors, who then take that money and spend it in malls and on cars and college for their kids and put it in their 401k's. Then the mall money pays for the paychecks of the people who work at the mall, and the profits of the companies that sell the goods, etc. etc. etc. Likewise, the $4b in taxes goes to pay for transportation projects that pay construction workers, medicare benefits that pay health care staff, military spending that pays soldiers, etc. etc. etc. Money never disappears unless you actually stuff cash under a mattress and forget about it.

rick

This should be a straightforward ROI analysis. For every dollar spent on auditing how much additional revenue is recovered?

Colin Young

I saw a figure a year or so back (maybe in the Economist), but IIRC, it was something like $8 for every dollar invested. Obviously at some point you're going to capture every uncollected dollar so you can't just keep pouring money into the IRS, but it seems that there is a pretty big pool of owed taxes that aren't being collected.

The real problem is the reaction people have to increasing audits (just look at some of the other comments here). In reality if you're reporting and filing your taxes honestly you aren't likely going to be audited (and apparently, as it appears things are going, even if you aren't reporting honestly). Maybe we need to introduce a system where if you are audited and you have in fact done things correctly (and allow for some wiggle room for honest mistakes that a reasonable person could be expected to make given the complexity of the tax code), you get a bonus of some sort to compensate you for the stress and cost of the audit. Why not take, say, 10% of the additional taxes recovered through audits and distribute that to the honest taxpayers who had to undergo an audit?

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Carl T

Political economics proves that when presented with a budget cut political agents will always propose to cut the most visible, valued, and meaningful aspects first so as to public pressure to preserve their empire. To be so silly as to believe this is laughable. 'Don't cut the schools or we will cut football and band'...

Jeff

The relationship between IRS auditing and tax avoidance is documented in the literature (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1668628). However, as Dan Marcin suggests, this loss of revenue does not suggest an unambiguous loss of social welfare due to under-auditing. Auditing consumes real resources in society, whereas it produces nothing--it merely shifts wealth from taxpayers to the government. The optimal auditing policy is not the one that maximizes revenue for the state, but rather, the one that maximizes societal welfare.

Joshua Northey

All sorts of things consume real resources in society without contributing to welfare other than shifting wealth, this is what 90% of the financial services sector is. We don't seem to raise eyebrows at those transactions?

All that matters is that there is a rule and the rule should be followed. It is horrible social policy to have a tax code and then not enforce it. As to what that code should be, that is a legitimate debate, but fostering a climate of tax avoidance is a feature of many societies that quickly ran into large problems.

The IRS should have any and all resources it needs to police the tax code, and if that is deemed to be too many resources we should change the code to a more easily enforced one (I would love a consumption/carbon tax instead of an income tax).

Geoff

Either a federal sales tax or simple flat tax that requires only a calculator could solve this problem. It would eliminate the need for the IRS or the industries that have sprung up around tax collection and evasion.

Joman

The comments so far confound me. You people are actually advocating that we encourage people to cheat on their taxes because it is so 'stressful' to the handful of honest people incorrectly called to an audit?! By the same reasoning, we should be slashing police department budgets left and right because they occasionally end up victimizing an innocent person. The only effective difference between the police and the IRS is that one deals mainly with violent crime while the other is only interested in white collar criminals and it is arguable which has a worse effect on society. A ridiculous double standard.

Seve29

Sorry but i am in need of educating, please help !

Would it not be easier and less expensive all round if you just increased the amount of tax you pay, and perhaps didn't allow individuals to write off the interest on their mortgage?, i believe thats what happens in the US, is this correct?

The US then might actually have a government that is then not continually in debt, as i think you cannot run a government based solely on tax from business, as a nation at some point you loose your competitive advantage against the rest of the world, basic capital and labour movement, tells you that, does it not?

i.e. Captial goes where Labour is cheapest ?, sorry but its not the US anymore so you have less tax revenue dont you?

So the easy answer i think is not to cut any budget at all but to increase tax then the Auditors could collect even more and be even more worthwhile?

my apologies for my stupidity, would that not make more sense?

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Phil

I have been audited several times, and can say from my experiences that whenever I had to pay back any money, it was because I had made a mistake. I soon learned to make the audit an educational lesson on how to properly file my taxes and report rental and business income and expenses. The last time I was audited, I had to pay back nothing, and have not been audited since in the last 20+ years. I prepare my own tax returns.

While I do agree that the tax code could be simplified, I have learned enough of what applies to me to get by.