A new report from the government’s internal watchdog found that richer taxpayers are benefitting the most from a broader decline in audit rates by the IRS, adding impetus to criticism that the U.S. tax system favors the wealthy, and possibly bolstering a White House push to increase taxes on the wealthy.
During the 2010s, audit rates of individual income tax returns have fallen an average of 72 percent across all income levels and tax brackets. That means that while taxpayers had about a 1 percent chance of being audited in 2010, they had about a 0.25 percent chance of being audited in 2019.
But that 72-percent drop hasn’t been evenly distributed. People earning less than $25,000 were only 60 percent less likely to be audited than they were in 2010, while people earning more than $200,000 were roughly 90 percent less likely to be audited, the report from the Government Accountability Office (GAO) found.
Democrats seized upon the discrepancy to paint a picture of a bifurcated tax collection system that treats the rich one way and average Americans another.
“There cannot be one tax system for the wealthy and another for everyone else. And yet that is exactly what we have,” Rep. Bill Pascrell (D-N.J.), chairman of the House Ways and Means subcommittee on oversight, said during a hearing on the report.
Pascrell did not spare his own party in assigning blame for unfairness in both the design and implementation of the tax system.
“We have had multiple hearings on making our tax system fair. We haven’t done much in getting things accomplished, though. That’s interesting,” he said.
“Clearly, our tax code can be fair, and I have offered legislation to close that gaping loophole and many loopholes in our laws that have faced resistance by vested interests. And that’s not all Republicans. My own party, sometimes we can’t get out of our own way.”
Republicans, meanwhile, reacted to the report mostly with operational concerns related to the pandemic-induced backlog of unprocessed tax returns, showing general lack of interest in the ethical debate put forward by Democrats on biases in the tax system.
“I believe the most significant unfairness facing American taxpayers right now is the lack of customer service at the IRS,” Rep. Tom Rice (R-S.C.) told the subcommittee.
“The IRS is sitting on 13 million unprocessed tax returns and over 26 million tax returns that are waiting, needing further IRS action. At the same time, IRS phone service levels are at near all-time lows, making it nearly impossible to reach an IRS agent for help with tax or audit matters.”
Pascrell acknowledged that Democrats, Republicans and agency administrators were all talking past each other, saying, “we’re in two different worlds.”
“There’s this aspect of it — operations,” he said. “And the other aspect is the laws itself, of a secretary paying a higher percentage than her boss on her taxes.”
The GAO report notes that wealthy taxpayers are still more likely to be audited than low and middle-earners. In 2019, people making more than $5 million a year had about a 2 percent chance of being audited, while those making between $25,000 and $200,000 had about a 0.17 percent chance of being audited.
IRS officials said audit rates declined because of staffing decreases and because it takes more time and expertise to deal with complex higher-income audits, according to the GAO.
The overall trend toward looser tax enforcement on the rich is consistent with other longer-term tax policies benefiting the wealthy that have been pushed by both Democrats and Republicans.
One such loophole long supported by Democratic lawmakers like Senate Majority Leader Charles Schumer (D-N.Y.) is the tax exemption on carried interest, which allows managers of private investment funds simply to skip out on paying taxes on the bulk of their income.
Closing the carried interest loophole was notably not a part of the Biden administration’s “billionaire minimum income tax” proposal, which does include provisions on taxing capital gains like stock price earnings.
As Jared Bernstein of the White House’s Council of Economic Advisers told CNBC last year, “This is a loophole that absolutely should be closed. But as you well know, when you go up to Capitol Hill and you start negotiating on taxes, there are more lobbyists in this town on taxes than there are members of Congress.”
One of those lobbyists is former Democratic North Dakota Sen. Heidi Heitkamp, now with consulting firm Alliantgroup, who led a campaign last year against a Democratic proposal to tax capital gains at death, arguing against a very similar measure to the Biden administration’s billionaire tax proposal.
“My point of view is you have to have a realization of that income” in order for it to be taxed, Heitkamp said in an interview. “Historically and consistently in America, it doesn’t apply until you realize the gain, and that’s the point that I’ve been making, is that taxing unrealized gains will have unintended consequences.”
“You could set the limit at $5 million, but if you had a small business that had $5 million worth of gains, you may be forced to sell your small business instead of having the family pass it on,” she added.
Of Biden’s billionaire tax, Heitkamp said, “It’s not likely going to pass.”