The Wealthy Get Tax Loopholes. The Poor Get Audited.
The wealthy aren’t paying their taxes, but it’s low-income taxpayers who are getting audited.
In the past decade, the IRS has audited low-income taxpayers who claimed the Earned Income Tax Credit (EITC)–with an average annual income under $20,000—at a higher rate than people making $500,000 to $1 million dollars a year. The IRS has been critically understaffed and underfunded for decades, and as IRS Commissioner Rettig explained, EITC audits are automated and simpler than going after millionaires, who have the resources to drag the agency into long legal battles. But this has serious racial, gender, and economic equity impacts. The most-audited counties in the country are majority Black rural counties in southern states like Mississippi and Alabama, where the average income is under $30,000 a year. Meanwhile, the top 1% are responsible for about $163 billion in unpaid taxes every year, and the IRS fails entirely to go after the hundreds of thousands of high-income earners that don’t file taxes at all.
The IRS audits low-income taxpayers at a disproportionately high rate because it is cheaper and easier than auditing the rich, but the negative effects of an audit on a low-income taxpayer can be dire. Unlike the top 1%, who have armies of lawyers and accountants to help them, EITC taxpayers rarely have the resources or assistance needed to dispute the audits. And losing the EITC refund can be devastating—for many low-income families, refundable credits provide a big part of their annual household income. In addition, being audited can have long-term effects on low-income taxpayers’ economic security and the likelihood that they’ll attempt to access benefits in the future. This is particularly devastating for low-income women, who already contend with economic disadvantage due to lower wages, gender and racial wealth gaps, and being overrepresented in poorly paid jobs.
To increase equity and recoup the hundreds of billions of unpaid tax dollars every year, the IRS should—with more support and funding from Congress—focus its resources away from low-income taxpayers and toward the top 1%.
A number of policy changes could help achieve that goal:
- Congress should provide more funding to the IRS so it can conduct high-cost, high-reward audits of wealthy taxpayers and incentivize those audits by implementing mandatory audit quotas for high-income taxpayers. Investment in the IRS is good fiscal policy—the Treasury Department estimates that every dollar in invested in IRS enforcement could yield $6 in owed taxes collected—and the resulting increase in revenue can be used to fund long-term priorities like paid leave and health care.
- Congress should pass the Tax Filing Simplification Act, which would make it easier for low-income taxpayers to receive the government benefits they need and reduce error rates that create administrative burden for the IRS. The current system is confusing and inaccessible, so qualifying individuals regularly submit EITC filings with small errors and are denied their refunds as a result. A simplified filing system could go a long way in ensuring people receive benefits.
- Congress should provide the IRS with additional funding to ensure that low-income taxpayers who are audited have legal assistance. The IRS provides grants to Low-Income Taxpayer Clinics, which provide legal assistance for low-income taxpayers, but the grants are not sufficient to meet the need. In fiscal year 2019, only 3% of low-income taxpayers who were audited had professional assistance during the process. Our tax system is incredibly complicated and tax assistance out of pocket is unaffordable, so low-income taxpayers need access to legal assistance if they are going to have a fair chance of receiving their refunds.
These policy changes and additional funds could help to create a more equitable tax system that focuses on raising revenue to support our shared priorities rather than target low-income taxpayers who are already disadvantaged by inequitable laws. The solution to closing the tax gap is making sure the wealthy actually pay their taxes, and it’s time we adopt policies to achieve that.
Written by: Kenna Titus, Legal Intern, Income Security