Today, Explained - It's a great time to cheat on your taxes

Episode Date: April 15, 2019

The IRS is in a bit of a crisis. ProPublica’s Paul Kiel explains how a profitable government agency succumbed to politics and ended up losing tens of billions in revenue. Learn more about your ad choices. Visit podcastchoices.com/adchoices

More than 40 million people around the world use Calm to help reduce anxiety and stress and improve their sleep. Right now, today, Explained listeners get 25% off a Calm premium subscription at calm.com slash explained. You can try all of their stuff at calm.com slash explained. Are you a patriotic American? Yes, sir. Eager to do your part? Yes, sir. Then there's something important you can do.

Oh, boy, oh, boy, oh, boy. I'll do it. You won't get a medal for doing it. Oh, that's all right. It may mean a sacrifice on your part. I'll do it anyway. But it will be a vital help to your country in this hour of need. Shall I tell you what it is? Yes, what is it? Tell me. Shall I? Tell me what it is. Your income tax. happy tax day maybe you spent all weekend crammed in a dark windowless room trying to finish them up

maybe you're at work right now still trying to finish them up maybe you've just given up and now you're filing for an extension, whatever your situation, if you stressed about your taxes at all this year, there's a pretty good chance you made a terrible mistake because the IRS isn't doing so hot right now. We think it's a crisis. Paul Keel has been writing about the agency for ProPublica. We think that the IRS is losing around $18 billion a year that it's not getting

because it's not auditing people in corporations, it's not collecting on tax that was not paid, it's not pursuing people who never even filed their taxes. And now, whereas you used to definitely hear from the IRS if you didn't file taxes and you probably owed some, now you may file and get some letters in the mail, but the IRS very well might not come after you. Their budget has been cut continually over the last eight years, and they've lost tens of thousands of employees. Their levels are at pretty historic lows in terms of how many employees they have doing the work that needs to be done. And so all that has a real effect in terms of how many employees they have doing the work that needs to be done. And so all that has a real effect in terms of how much the IRS is able to collect.

And that's where you get into really, really big numbers that go from the tens of billions to the hundreds of billions that's being lost. How many employees are at the IRS right now? Do you know? It's just under 80,000, I believe. And so, you know, the bulk of those are people who are answering phone calls, doing customer service type stuff. And then there are, you know, the auditors and the people doing collection actions. And so one thing we pointed out in our story was there are now fewer than 10,000 revenue agents. And those are like the main auditors of the IRS. And the last time there were fewer than 10,000 revenue agents in the IRS was 1953.

So in terms of just numbers, in terms of audits, it's pretty dramatic. The audit rate is down more than 40%. They're doing 700,000 or so fewer audits a year than they were doing before the budget cuts began. Do the bulk of the American people have any idea that this organization that's supposed to keep them accountable is basically a shell of what it's supposed to be or what it once was? Yeah, I mean, I think people have different kinds of interaction with the IRS. So I think for, you know, your average person who has a job and is paid in wages, their interaction with the IRS generally is going to be very automated, right?

They might get a letter saying, hey, you said that, you know, your income was X, but, you know, your W-2 said it was Y. But then there are people who, you know, business owners, the wealthy. A lot of rappers that I know, they literally take care of their whole family. And that's not tax-reductable

because the IRS don't consider that a business. On top of that, being an artist, looking good for y'all, doing all this extra shit to please y'all, that shit costs money. Like me, for example, my bills is like, I'll say about $300,000, $250,000 every single month. And I try to put it cheaper, and it's just not. Tax professionals that they work with definitely know that they're seeing far fewer audits. They're seeing an IRS that is much less aggressive because of the lack of staffing than it used to be. And that's the area or the people who would kind of realize that the IRS is not there and that could potentially lead to changed behavior.

And what kind of behavior are you talking about? Cheating on your taxes? Yeah, so there's black and white cheating, which is just hiding income. That's the biggest form of cheating on taxes. And then there's gray areas, you know, claiming a credit that, you know, maybe if the IRS were to look at it, they might not agree, but there's, you know, a rationale for it. There's kind of a range of activity, but if everyone is pushing boundaries at the same time, there's definitely gonna be a cumulative effect. And that effect is, as you said, just over $100 billion in lost revenue. So the IRS studies this, they call it the tax gap.

And the tax gap is how much in taxes should have been paid and was not paid. And so the last time they did a big study like this was 2016. They looked at 2008 to 2010. These studies are always really comprehensive. They involve lots of sort of random audits the IRS does. And so in 2016, they looked back at that prior time period, and they said people paid about 82% of the taxes they should have paid. And that's actually a great number internationally.

Other countries struggle to collect their taxes, and this is something that is sort of a point of American pride that our level of tax compliance is so high, even though when you put the numbers together, $3 trillion in taxes were paid each year over the last several years. So if you think about 82% in that context, it gets to be about between $600 and $700 billion. That's the tax gap, which is not a small amount of money. No. Do we have any idea of who doesn't pay their taxes? Who falls into that 18% of people who are skirting the system or cheating the system?

Yeah. So it's pretty easy for the IRS to keep tabs on people who have a job. So the compliance rate of wage earners is about 99% in terms of income. So in terms of who's able to hide income, it's business owners. You know, someone who has a small business that's essentially themselves, all the way up to, you know, more closely held businesses, partnerships. That's where the real money is. And the hard thing for the IRS is that those are often hard things to audit. It's hard to find income that's being hidden from the IRS because they don't know that it's there.

They have to do the audits, and they need a skilled person to do those audits. It's not the sort of thing that can be automated easily. So that's where the noncompliance is, and that's where the IRS is definitely not doing enough right now. So we've basically got this two-tier system. If you're a small business owner or a wealthy person with a crack accountant, you can hide all sorts of income. You can cheat the system. But if you're just some person on a company's payroll, like most of us, you can't really cheat. Do the regular people get audited more because it's easier to find an inconsistency? So we looked at what the IRS tends to call the audit mix. And to my surprise,

I didn't know this before getting this coverage, is over a third of the audits that the IRS does are people who receive the earned income credit, which is one of our largest anti-poverty programs. It's a program that is supposed to go to low-income people who are working, and it's supposed to incentivize work because of that, and give them extra money that often pulls them above the poverty line. So the number is around 5 million children are pulled out of poverty every year through this program. And it's widely praised across the spectrum in terms of being a very effective, targeted program and helping the working poor. If you work and have kids, you get a little kickback. People love it.

But it's also become politically divisive, right? Yeah. I mean, Republicans, going back to the 1990s, Newt Gingrich, have put a lot of focus on improper payments of this credit. So credit going to people who don't qualify for whatever reason. And have always put a lot of pressure on the IRS to audit people who receive the credit to make sure that it's going to the right people. And what we noticed in looking at the audit mix is, like I said, the audits at the very top have fallen precipitously. But the area that has fallen much less quickly is these audits of the income credit recipients.

And the reason for that is they're largely automated audits in that, you know, a computer is selecting someone because some risk factor comes up for whatever reason. And it sends out a letter. And that's the audit beginning. Usually the letter says, Review the list of items we're auditing and provide copies of documentation to verify what you claimed on your tax return. We don't think that the kid that you claimed as a qualifying child on your tax return is really a qualifying child. And so then the taxpayer has to prove that the child lived there. You have to find a piece of paper that said, this kid was at

my house in this year, and not just on a certain date for over six months of the given year. And so it sends people running around to, you know, does their daycare have anything on paper? Is there a doctor thing that we can show and we can piece this together? And it's a very confusing process. And then the particularly frustrating thing about it is computers initiate these audits, but then if you get these documents together, you send them in, that's when a human being has to look at them. And because the IRS has been losing staff at such a rate, that's where there's a major backlog. And so people I talk to are getting letters from the IRS saying, hey, we got your packet of documents. We'll get

back to you in six months. That hurts because people are depending on these refunds. It's a couple thousand dollars. Loan people tend to file their taxes as soon as possible, as soon as February comes around. Usually they're filing their taxes in hope of getting this refund by the end of February. And it's to, you know, catch up on their car loan or on their rent payments or whatever. And when that money doesn't come, which it tends not to come, that is enormously frustrating. This whole situation at the IRS where you've got wealthy people and business owners bypassing the system, but regular and low-income people getting extra attention, where you've got budget cuts and the fewest auditors since 1953,

you'll never believe it, but it's all happening because of... Obamacare. That's next on Today Explained. I don't know a whole lot about meditation, but one of our colleagues here at Vox.com has been offering meditation breaks during lunch every so often. And the show's engineer, Afim Shapiro, has been going. And I can say this. He comes back and he is even more chill and relaxed than he usually is.

Sometimes he's not wearing his shoes anymore and he seems pretty happy about that too if you don't have a colleague who's offering meditation sessions check out calm more than 40 million people around the world have downloaded the app if you head to calm.com explained right now you get 25 off a calm premium subscription which includes guided meditations on issues like anxiety, stress, and focus. It includes a brand new meditation each day. It has sleep stories. It's got soothing music. calm.com slash explained right now. Unlimited access to all of the calm content out there at calm.com slash explained. So how exactly did we get here?

Why were there budget cuts on the IRS to begin with? So it started with the Republican Congress that came in after the Tea Party wave in 2010. So the Republicans took the House and immediately they were wanting budget cuts across the government. But there was a special attention on the IRS. And one main reason for that was that the IRS was a big part of Obamacare.

They were sort of the back end doing a lot of the stuff that was going to make Obamacare work, getting subsidies to people, and they had to make sure that people had health insurance. And so Republicans were going after the IRS as a way to cripple Obamacare. The IRS has a role in nearly 50 different aspects of Obamacare. This is nothing short of an unwelcome big government overreach into the most personal aspect of our lives. And then in 2013, this sort of scandal erupted over the IRS supposedly targeting right-leaning non-profits, particularly Tea Party groups. I've reviewed the Treasury Department Watchdog's report, and the misconduct that it uncovered is inexcusable. This IRS official named Lois Lerner became the center of it. She was called to testify numerous times.

Ms. Lerner, why did you order Tea Party cases to undergo a multi-tier review? On the advice of my counsel, I respectfully exercised my Fifth Amendment right and decline to answer that question. It totally exploded and became the rationale for really slashing the budget of the IRS over multiple years because these investigations continued over a couple of years. I mean, this area of the IRS that audits these nonprofits is a pretty small part of the IRS. And, you know, Democrats opposed the cuts, but it obviously wasn't the hill that they are willing to die on. I mean, the IRS has not ever been a very popular cause. Nobody really likes the tax man. So there are some sharp cuts in some years.

In other years, it was just sort of held down. And the cumulative effect over these eight years is over a $2 billion cut from the budget. Was the IRS actually targeting the Tea Party? Was any of this controversy justified? I think the root of this is lack of resources. So we asked the IRS to make sure that nonprofits that should not be political are not being political. And it's very vague how they're supposed to do this and the lines are supposed to draw. But there was like a kind of a boom in nonprofits registering. A lot of them were like local Tea Party organizations. And on top of the fact that, you know, we have a general dark money in politics problem that the

IRS is supposed to police somehow. And they were completely overwhelmed. And essentially what happened is they started using shortcuts and they were trying to find, well, how do we know whether organizations being, you know, overly political will have certain keywords that we'll use? And that was discovered, and essentially it was a form of targeting. Although what eventually came out only much later was that the IRS actually had these keywords across the political spectrum. So they're also looking for, you know, like progressive groups and Occupy Wall Street, and there's like keywords like that. But what the initial focus on was keywords like Tea Party or, you know, First Amendment or whatever might tend to be more on the right of the spectrum. And so the accusation was that Obama was using the IRS to

persecute right-leaning conservative nonprofits. That was the root of the scandal. And there were real problems in that division. They were taking shortcuts they should not have been taking. But it became the sort of rationale for getting the entire IRS or distrusting the entire IRS when that never really made much sense. So you've got the Tea Party going after the IRS. You've got Republicans going after the IRS. You've got Obamacare in the mix. Was this the most political moment the IRS ever had? Well, I think definitely the cuts happened because of that politicization. But stepping back, it's just really dumb to cut the IRS's budget. Everyone agrees

that it's one of the few areas of government that you actually get a lot more money than you put in. That's got a positive return on investment, which is not something you can say about most areas of government spending. So it's a no-brainer to more adequately fund them. And having conversations with Republican staff and the relevant committees, they agree with that. So why do it? Why cut so dramatically the budget and the personnel of an organization that brings in more money than it costs? I mean, it played politically. Today is tax day.

I mean, for the same reason, you know, Ted Cruz, like one of his stump speeches when he ran for president was, We should abolish the IRS. They would do that by changing the tax system, but that was supposed to be like the main selling point of his tax plan was that, you know, you wouldn't have the, you know, the jackbooted thugs in your life anymore. So it's been a political winner for Republicans. And that's why the IRS is a fat target.

Is part of this easier to do because everyone on some level thinks filing taxes and paying taxes is a drag? Yeah, I think it's people conflate paying taxes with the IRS, right? And they're two different things. The IRS did not write our tax laws, which are kind of a mess. And so everyone hates paying their taxes because our tax system is a mess, super complicated. It's not fun. And then the IRS is the one who has to kind of make that work. And so it's easy to, you know, make them a scapegoat for a system that they are not responsible for. Have you talked to lots of IRS employees, a few IRS employees, former employees, current employees?

Lots. Yes, lots of employees. Well, I think we're getting somewhere over 70 or 80, yeah. Wow. So, I mean, what kind of things do they tell you about working in the organization right now? Well, first of all, it's kind of remarkable to me. A lot of people have been there for 30 years. And so they feel really sad, actually, about what has happened. They care about the IRS, they care about the mission, and they're frustrated to see, you know, you build like a life of work, you build skill, you get better at things, and then people retire, and then those skills leave. And so, like, why did I do all that? I encourage people to

talk to government employees to help you view them as people. I'm often struck by how much they think of themselves as public servants. And frankly, a lot of these people could have made a lot more money if they'd gone into the private sector. If they'd worked on the other side of the table working for taxpayers, if they worked as a CPA, they would have made more money. And they chose not to because they thought what they were doing was meaningful. So what would it take to get the IRS back on its feet? Is it just a matter of restoring funding or would it take a lot more? So definitely money is the easiest thing.

And like I said, a no-brainer because it's such a no-brainer that in Trump's presidential budget that they put out not too long ago, there's actually a proposal in there to give money to the IRS for enforcement. And it shows, you know, positive tens of billions of dollars that would be collected over the 10 years that they're increasing funding for IRS enforcement. So at this point, everyone across the political spectrum apparently agrees that giving them more money for enforcement is a good idea. You know, the problem is that there would be a learning curve. So you put money in and you allow them to start hiring people. It's going to take time for them to build skill sets and competence and to get people where they're actually going out and doing a good job. Paul Keel reports for ProPublica he filed his taxes. So did Hannah Bolaños, who helped out with this one,

and Siona Petros, who's our intern. Our engineer Afim Shapiro used TurboTax. Our editor Bridget McCarthy made her husband Dan do them. Our producer Noam Hassenfeld wants to remain a mystery. And of course, Irene Noguchi did her taxes. She's the executive producer, y'all. I'm Sean Rottmester. I filed an extension. This is Today Explained. Meditate on this for a second. Right now, Today Explained listeners get 25% off a Calm premium subscription at calm.com. That is my favorite website, calm.com. Unlimited access to all of Calm's contents today at calm.com.