Commentary: Honest tax payers should want more IRS audits. Not of themselves, of course, but in general. The reason is to incentivize those who are less honest to pay their taxes.
In fact, a lot of taxes go uncollected. An IRS study for tax years 2008-2010 found he tax gap, which is the amount of money owed the IRS but not paid, averaged $406 billion per year. This translates into 16% of taxes going unpaid; about 2.8% of GDP.
If the gap today is proportional the same size as it was when the study was done, the tax gap this year is $600 billion. For context, the deficit in 2018 was $779 billion. Even if you are not concerned about the deficit, and I think it a second order issue, $600 billion would go a long way toward funding the anticipated social security deficit.
The IRS budget is about $1 billion less than it was 10 years ago, down from $12.1 billion in 2010 to $11.2 billion now. That pays for fewer agents, whose numbers have declined by one-third. Meanwhile, the number of filers has increased.
The consequence of all this is fewer audits. For tax payers with incomes over $1 million the chances of an audit have dropped from 1-in-8 to 1-in-25; for tax payers with incomes $200 thousand or more the chance was 1-in-25, but now 1-in-80. Overall, the chance of an audit has fallen from 1-in-90 to 1-in-160.
A newly hired IRS agent easily can pay their own salary in additional revenue collected from audits. The average audit generates $27,000 in revenue. The average salary of an IRS agent is $60,000. Three audits are enough to cover salary and benefits. What a deal. Yet the number of agents continue to decline.
It is not just the amount collected in audits that is the revenue collected from audits. Also included is the incentive to cheat. To the extent that fear of audit drives honest tax filings, then increasing the chance of an audit increases revenue via increased collections from those audited, and also the increased reported income by those who fear a tax audit who, because of that fear, take care to pay all that they owe.
Then there is the reason for the decrease in funding for the IRS, which is the substantial distrust of the agency, especially on the right, but more generally also. In past decades, IRS agents developed a reputation for high-handedness during audits that left a bad taste in the mouths of voters. The backlash resulted in declining budget.
But then there is the silliness of filing taxes in the first place. Most developed countries do not depend on private citizens to voluntarily own up to the taxes they owe, but rather bill taxpayers their estimated taxes. Tax payers have the option to dispute their tax bill but most just pay.
The U.S. could easily implement such a system. In fact, the IRS tracks the W-2s and 1099s issued to each tax payer and could easily use these to generate a bill for estimated taxes. And should you omit one of these forms from your taxes, the IRS will let you know.
So why not just have the IRS issue these income estimates prior to taxes being paid rather than after. Then rather than spending hours calculating our own taxes in anticipation of April 15, instead we could just write a check and forget about it.
Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He always tries to pay the taxes he owes, but not a penny more. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu.