Compassionate Conservatism comes to the IRS!


New York Times:

Tax refunds sought by hundreds of thousands of poor Americans have been frozen and their returns labeled fraudulent, blocking refunds for years to come, the Internal Revenue Service’s taxpayer advocate told Congress today.

The taxpayers, whose average income was $13,000, were not told that they were suspected of fraud, the advocate said in her annual report to Congress. The advocate, Nina Olson, said her staff sampled suspected returns and found that, at most, one in five was questionable.

A computer program selected the returns as part of the questionable refund program run by the criminal investigation division of the Internal Revenue Service. In some cases, the criminal division ordered that taxpayers be given no hint that they were suspected of fraud, the report said.

Most of the poor people whose returns the computer flagged as fraudulent were seeking the earned income tax credit, a benefit for the working poor. The credit can return all of the income taxes and Social Security taxes withheld from the paychecks of poor people. Without the credit, many poor people coming off welfare and going to work would receive less money because of taxes taken out of their paychecks and the loss of health benefits, I.R.S. data and other government documents show.

The average refund sought was $3,500, which under the rules for obtaining the credit means that the vast majority of those suspected of fraud were single parents or married couples with children. The maximum benefit for singles is less than $400.

Ms. Olson said the I.R.S. devoted vastly more resources to pursing questionable refunds by the poor, which she said cannot involve more than $9 billion, than to a $100 billion problem with unreported incomes from small businesses that deal only in cash, many of which do not even file tax returns.

(emphasis mine) Meanwhile, the IRS is trying to make it harder to study its tactics – especially those that favor the wealthy.

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3 thoughts on “Compassionate Conservatism comes to the IRS!

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  1. It is a poorly kept secret that the IRS dedicates much more time to combating suspected fruad by low income earners than by high income earners. One reason is that the high earners tend to hire attorneys which makes the process much more expensive for the IRS. Another is that the IRS flags returns for investigation based on an automtic sorting program that compares, among other things, gross income to the size of taxable income. The example that follows is hypothetical, but not far off from the truth: Someone who earns $20,000 and writes $10,000 off is more likely to be flagged for investivation than someone who earns $10 million and writes $3 million off. Guess who the more likely tax cheat is? Another frustrating part about all of this is that the person at the low end may well have made a mistake — those forms are complicated. For that mistake the IRS will put them through the wringer. The millionaire likely has a tax professional preparing her taxes; someone paid to scheme to write off as much as possible, and beat the IRS’s automatic sorting programs. Again, who is the more likely cheat?

    Some of this is the result of lower IRS budgets over the years. A higher budget for combating tax evasion would probably considerably help re-order the IRS’s priorities.

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