The trio sang, “If I call it a ball, then they call me a slob, if I call it a strike, then they call out the mob.” No, nobody loves the ump, even if they understand the game can’t be played without the ump.
Why is this? Well, each team wants some assurance that the other team will not make calls slanted to their desire to win. Each team supports a neutral party.
Nobody loves the IRS. Maybe, unlike our baseball game, we want to play our tax game without the “benefit” of the IRS.
The IRS-as-umpire analogy dissolves when we all perceive ourselves to be on the same team competing with the IRS. Who needs a neutral party to ensure fairness in such a game?
People in general do not seem alarmed by low IRS audit rates. Members of Congress seem equally undisturbed.
A recent General Accounting Office study looked at changes in IRS audit activity from 2010 to 2019. This report was picked up in the popular press.
The press reports did not seem to focus on low audit rates driven by lack of IRS resources. Instead, the focus seemed to be on equity of audit rates across income groups.
I used to think that people would support enforcement of the tax laws. I’m not so sure any more. Maybe we see each other as part of the same team and we don’t really want an umpire.
What we do want is to be sure that the calls made for or against us are equivalent to the calls for and against others. If the laws must be enforced, we want equal protection under those laws.
We may not want any umps making rulings on our tax returns, but, if they must be there, we want to be sure that each of us faces the same strike zone.
This assessment may be wrong. However, equal treatment is the portion of the GAO report that is attracting attention in the media.
For 2019, the audit rate of those with $200,000 to $500,000 of positive income was the same as for those with $25,000 to $200,000 of positive income. Both were 0.17%, or one in 588 returns.
The audit rate for those with $1,000 to $25,000 of income was 0.40%, or one in 250 returns. This figure sparked some outrage. More on that in a moment.
Audit rates weren’t always so low. From 2010 to 2019, the audit rate for those with $200,000 to $500,000 of income dropped by 92%. The rate for those with $5 million or more of income dropped by 86%.
Is the explanation for these figures a lack of equal protection? Hard to say, but the explanation for the drop in audit rates is simple. From 2010 on, the IRS resources devoted to audits dropped by 29%.
IRS audit staffing levels are now the same as in 1973. In 1973, 80.7 million individual returns were filed. In 2019, 157 million were filed.
If staffing is low, why not focus the limited resources on the high-income taxpayers. An audit of a taxpayer with income between $200,000 and $500,000 averages a $18,263 adjustment. If income exceeds $5 million, the adjustment averages $284,810.
Adjustments for those with income between $1,000 and $25,000 average $5,169. Most of this is likely from earned income tax credit errors. EITC adjustments average $4,955.
Audits of those with $200,000 or more of income take more than twice as many hours. In fact, the adjustment per hour of effort is highest for low-income taxpayers.
Scarce resources mean audits rely on letters, not people. In addition, the letters are generated by matching reported information with what is on the return.
Lack of personnel leads to taking the easy way out. That means more audits for those with simpler returns with “matched” tax data.
Don’t like umpires? The more you obscure the plays in your game, the less you will be hearing from the umpire. Sometimes, the ump really is blind.
Jim Hamill is director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. Reach him at email@example.com.