If there is one day a year when it should be better to poor than rich, it’s Tax Day, April 15.
The way the system is supposed to work is that the more you make, the more you owe, so Americans with high incomes have to hire expensive lawyers and accountants to fill out their tax returns, and then cut big checks to the government. Meanwhile, people with lower incomes, who have tax deducted from their paychecks throughout the year, don’t have much paperwork to fill out and can usually expect a refund.
But somehow, even Tax Day has been turned around to favor the rich. Billions of dollars of income are estimated to go unreported every year, and some individuals have been known to use their resources to evade paying what they owe. However, they are less likely to be audited by the IRS than the poorest people in the country.
That shocking fact has been established through reporting by ProPublica, the investigative journalism nonprofit. They found that someone who earns $20,000 a year would be more likely to be audited by the IRS than someone who reported a $400,000 income. Another study, first published this month in the trade journal Tax Notes, found that some of the poorest counties in the country had the highest audit rates.
The analysis showed that Humphreys County, Mississippi, with one-third of its population living below the federal poverty line, was the most audited county in the nation. The authors found that people living in Humphreys County, which has a median annual household income of $26,000, were audited 51 percent more often than people living in Loudoun County, Virginia, where the median family income is $130,000 a year.
This pattern holds true in Maine, where the two counties that have the highest tax audit rates are the state’s poorest – Washington County, with a median annual income of $40,000, and Piscataquis County, with a median income of $39,000 a year. Maine’s median family income is $53,000.
Something is clearly wrong with this picture, sparking a demand for information from Maine Sen. Angus King, who called the frequency of audits in these counties “unacceptable.”
“It causes severe economic hardship for those who can afford it least,” King said in a letter to Internal Revenue Service Commissioner Charles Rettig. “I am deeply concerned for the financial well-being of my state’s most vulnerable citizens.”
King and ProPublica say the reason for this upside-down policy is an attempt to police the earned income tax credit, a program designed to help the working poor that began under the Reagan administration and was expanded in the 1990s. The credit is fully refundable, so even people who earn too little to owe any federal income tax can get a refund if they file a return.
The EITC is considered the most effective anti-poverty program for low-income families because it rewards work by supplementing income. No one is getting rich off this program: The credit starts to phase out at $14,450 a year for a married couple. But even so, as King points out, people who receive it are more likely to be audited than all but the richest group of taxpayers.
These audits are a burden even if the low-income taxpayer is ultimately cleared. Unlike the millionaires, poor families can’t pay lawyers to represent them, and they probably don’t have the savings to wait for their refund while they go through an audit.
And this kind of effort won’t generate much income for the government. In his letter, King cites the National Taxpayer Advocate to say that EITC overpayments account for 6 percent of gross individual tax noncompliance. Meanwhile, individuals who underreport business income account for 51 percent.
The IRS is clearly wasting resources going after pennies in places like Washington and Piscataquis counties when there are dollars going uncollected elsewhere. Everyone should pay what they owe.
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