IRS audits poorest families at five times the rate for everyone else • Hacker News Board

Re: IRS audits poorest families at five times the rate for everyone else

#181

Post by koheripbal » Thu, Aug 11, 2022, 8:42 PM UTC

JumpCrisscross wrote: post #123

moomin wrote: post #23

Earlier quoted context omitted.

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.

> 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…

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.

Re: IRS audits poorest families at five times the rate for everyone else

#182

Post by NovemberWhiskey » Thu, Aug 11, 2022, 8:45 PM UTC

koheripbal wrote: post #181

JumpCrisscross wrote: post #123

Earlier quoted context omitted.

> 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…

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-au…

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".

Re: IRS audits poorest families at five times the rate for everyone else

#183

Post by biomcgary » Thu, Aug 11, 2022, 8:49 PM UTC

gist wrote: post #163

moomin wrote: post #23

Earlier quoted context omitted.

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.

> 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 e…

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).

Re: IRS audits poorest families at five times the rate for everyone else

#184

Post by NovemberWhiskey » Thu, Aug 11, 2022, 8:51 PM UTC

shemnon42 wrote: post #15

Is this really a fallout that the poorest families are more than five times more likely to do their own taxes instead of hiring a tax professional? Most audits are to account for sloppy bookkeeping or not attaching the correct documentation, not uncovering tax fraud schemes. (but many good tax fraud schemes look like bad bookkeeping, to be fair).

I couldn't find a more recent statistic; but lower incomes families are actually not much less likely to use a tax preparer than higher income families:

https://www.taxpolicycenter.org/briefing-book/why-do-low-inc...

Re: IRS audits poorest families at five times the rate for everyone else

#185

Post by NovemberWhiskey » Thu, Aug 11, 2022, 8:57 PM UTC

jmyeet wrote: post #137

josephcsible wrote: post #111

Earlier quoted context omitted.

> In fact, auditing anyone who makes less than $50,000 a year should be illegal. Maybe even $100,000. Why would anyone who made under $50,000 or $100,000 ever bother to pay one cent of taxes if you did that?

For one, the vast majority of those people are W2 employees. Their taxes are withheld at source. Let that be whatever taxes someone pays. Take it further: the IRS just gives you a form at the end of the year saying your income was $X and your taxes withheld were $Y. Sign here to get a refund or pay the shortfall (which, if withheld correctly, there should never be a shortfall). That's actually how it works in most de…

>For one, the vast majority of those people are W2 employees.

... how long do you think it would take for everyone of those W2 employees to be filing for the Foreign Tax Credit every year if it were illegal to audit them?

Re: IRS audits poorest families at five times the rate for everyone else

#186

Post by ghaff » Thu, Aug 11, 2022, 8:57 PM UTC

LorenPechtel wrote: post #127

lostcolony wrote: post #47

Earlier quoted context omitted.

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 complic…

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.

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.

Re: IRS audits poorest families at five times the rate for everyone else

#187

Post by quickthrowman » Thu, Aug 11, 2022, 8:57 PM UTC

jmyeet wrote: post #166

Test0129 wrote: post #114

Earlier quoted context omitted.

This is certainly the hottest possible hot take. > Have inheritance trigger a taxable event. This includes, by extension, allowing heirs to inherit stocks and property on a stepped up basis for CGT purposes; This works for billionaires but harms regular people. If you applied capital gains tax to grandpa's modest gift to his grandchildren the grand children may very well end up with nearly nothing. In many states pro…

> If you applied capital gains tax to grandpa's modest gift to his grandchildren the grand children may very well end up with nearly nothing. That's such a funny remark. First, this implies the tax rate is 100%. How else could you end up with nothing? Long term capital gains is what? 20%? If the "modest gift" of a $1 million house with a cost basis of $300,000 results in $140,000 in capital gains taxes, you still hav…

> It's a remarkably easy problem to solve. Just tax 1-3% of the net value of your assets based on their value on December 31 of each year.

Easily avoided by liquidating assets on Dec 30 and rebuying on Jan 1 (or Jan 30 to avoid wash sale if needed)

It would also have a nasty side effect, there would be many sellers and few buyers on Dec 30, so the market would crash every single year at EoY.

Re: IRS audits poorest families at five times the rate for everyone else

#188

Post by worik » Thu, Aug 11, 2022, 8:59 PM UTC

bryanrasmussen wrote: post #126

moomin wrote: post #23

Earlier quoted context omitted.

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.

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.

> 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.....

Re: IRS audits poorest families at five times the rate for everyone else

#189

Post by missedthecue » Thu, Aug 11, 2022, 9:02 PM UTC

mrguyorama wrote: post #122

missedthecue wrote: post #58

Earlier quoted context omitted.

~19 cents in postage and a few cents more for the envelope and letter.

Is the IRS not postage exempt?

"USPS bills the IRS monthly via the Intra-governmental Payment and Collection (IPAC) system for one-twelfth of the yearly postage estimate"

https://www.irs.gov/irm/part1/irm_01-022-004

Re: IRS audits poorest families at five times the rate for everyone else

#190

Post by toast0 » Thu, Aug 11, 2022, 9:08 PM UTC

jmyeet wrote: post #75

NovemberWhiskey wrote: post #11

The reason for this is almost entirely the Earned Income Tax Credit. The IRS estimates 21-26% of all EITC claims are improper. The rules are quite complex, which results in more errors and it is relatively straightforward for the IRS to detect certain classes of mistake or fraud through automation (i.e. to detect if the same child was claimed as a dependent by two different people on their return). Congress made the…

> Is the IRS just supposed to ignore that? Yes. Or, better yet, just give it to everyone and pay for it by: 1. Eliminating the carried interest tax credit, which has somehow survived 15+ years. It is quite literally a giveaway to hedge fund managers who get to pay lower taxes on managements because reasons. It most recently survived by being removed from the Inflation Reduction Act at the behest of Senator Kirsten Se…

> 2. Treat any borrowing in the US the same as repatriating foreign profits if there are any. Effectively you want to stop companies keeping profits offshore (to avoid tax) yet fund US operations with debt;

I think you need to update your screed for the Trump era tax changes. There's no longer a tax on repatriated earnings (they're exempted from corporate income), and the previous funds held offshore were taxed as a one-time charge (optionally payable over 8 years). There's no longer a US tax reason to keep your offshore profits offshore.

> 3. Have inheritance trigger a taxable event. This includes, by extension, allowing heirs to inherit stocks and property on a stepped up basis for CGT purposes;

Inheritance isn't a taxable event, but death is. The step-up in basis corresponds to being subject to the estate tax. When the estate tax expired, estates weren't subject to tax, but there was no step-up in basis; it was made retroactively optional to subject the estate to the estate tax and get a step-up in basis. Certainly, the federal estate tax has a pretty large deduction, but just because the effective tax rate for a lot of estates is zero, doesn't make it not a taxable event. Of course, raising the estate tax comes with a lot of bad PR about people's family farms and what not; any honest attempt to increase estate taxes needs to address that, perhaps with an installment plan/lien for illiquid property -- if you can pay the taxes on the proverbial family farm over 10-30 years or when the property is sold, that might be more palletable

> 4. Tax stocks on market value every year just like we do with property.

The US government doesn't run a property tax. Maybe you want mark to market income taxation on stocks? That's possible, but you'd need to make capital losses refundable or at least add carry-back, or people who were invested into a crash are going to be pretty grumpy. Paying taxes on unrealized gains as of Dec 31 in April when the market is in the toliet isn't palatable either.