Every other week, it seems, the leftist tax-exempt nonprofit Pro Publica (which poses as a media outlet) publishes another tranche of tax records illegally leaked from the IRS. This disclosure, which is a federal criminal felony punishable by up to five years in prison for every count, invariably targets rich or famous taxpayers. The stories are overhyped (“how dare he claim depreciation!”), but the goal is always the same: Use IRS data which is supposed to be locked down tight to troll the rich or famous in service of higher taxes on the rest of us.
That’s why it’s so odd that the Beltway professional class (journalists, academics, Capitol Hill veterans, et al.) appear so hellbent and determined to give the IRS extra money to audit us all. Usually discussed as a “pay for” in bipartisan infrastructure packages, the idea is that if taxpayers fund the IRS to the tune of $40 billion over the next decade, the IRS will step up audits and collect an additional $100 billion in tax revenue, penalties, and interest. This is lauded as a good because of the supposed “tax gap,” the number the IRS says is the difference between taxes actually collected and taxes owed under perfect compliance. Apparently, it doesn’t occur to anyone that the IRS, which is seeking this extra $40 billion in taxpayer funding, has every incentive in the world to exaggerate this “tax gap” and to make wild promises about the new money that additional enforcement will yield for the Treasury. This plan is opposed by conservatives who have rightly urged Republicans to stay away from it.
Nonetheless, the idea is popular because people who have never experienced a full “field audit” perceive it as painless, or even virtuous. After all, everyone should pay the taxes he legally owes, audits compel both the target and those who don’t want to be the next target to pay what they legally owe, and tax cheats are bad people. This is easy to say for academics and journalists — most of them will never start businesses or deal with a tax form more complicated than a W-2. The problem is that’s not how audits work.
Unlike the professional pro-audit Beltway commentariat, I wear a hat that includes my role as an audit expert. For the past two decades, I have run a seasonal tax-preparation business. The IRS recognizes me as an “Enrolled Agent,” which means among other things that I can represent taxpayers before the service in the event of an audit. Thankfully, I have had to help with only three field audits in these two decades (out of well over 1,000 tax returns prepared).
The clients in question, with whom I perpetually maintain a kind of attorney–client privilege, were not and are not tax cheats. They are ordinary (for the Beltway area) self-employed people. They make a very good living, but we aren’t talking about millionaires. That’s exactly the target the IRS has in mind with audits: people with self-employment income, big enough for the audit juice to be worth the assessment squeeze, but not so big that they have professional accounting and law firms on retainer.
These audits, which as best I can tell were selected more or less randomly, were all fishing expeditions. Our taxpayer is informed that two or more years are under review, and that they must produce copious receipts, invoices, bank-account statements (both personal and business), credit-card receipts, calendars, emails, etc. They must justify every plane ticket, hotel room, business meal (with whom, and what did you talk about?), parking stub, business mile, and Uber ride. Because these businesses aren’t large enough to retain full-time bookkeepers and accountants, the records are usually good but not perfect. There normally isn’t any doubt that the expense claims are valid, but the IRS loves to impose record-keeping foot faults too lengthy to explicate. That’s when the IRS swoops in, demands a few thousand dollars in penalties and interest, and moves on to the next victim.
This process is both gut-wrenching and tortuous. It usually takes at least a year to fully resolve an audit. Appeals are recommended since the initial examiner’s job is to maximize the claim for more money. From beginning to end, the taxpayer is gaslit by the process into thinking he is some sort of criminal when in fact he did his best to keep records and comply with the tax law.
Why can’t additional IRS audits just go after the obvious tax cheats or the ultra-wealthy? Because that’s not where the money is; nor do people wear “tax cheat” lapel pins. The only way the audits “work” is if the several-hundred-thousand-dollar-per-year self-employed guy is the target, and if the IRS targets lots of them. Is that what Republicans are in the business of advocating now? Giving money to IRS bureaucrats to conduct fishing expedition audits on millions of honest self-employed people? The same IRS behind the Lois Lerner scandal a decade ago, when the IRS inappropriately targeted conservative political groups during the 2012 election season, when Obama was running for reelection?
All the bank-account statements, emails, etc. collected in an audit are in the files of the IRS (the same IRS that leaks like a sieve to Pro Publica). It makes no sense to give the IRS more money to conduct predatory audits against small-business employers and then subject those audits to risk of illegal disclosure.