Monday, January 24, 2005


Honor System For The Rich, Audits For The Poor

The IRS spends a significant amount of time enforcing the "earned income tax credit" (EIC) a tax break for the working poor. Arcane rules and vigorous enforcement are mandated. What level of enforcement does the IRS use for verifying taxable capital gains, where at least four times the amount of taxes are at stake? Little to none:
Investors, entrepreneurs and landlords annually avoid paying at least $29 billion in taxes by overstating the price of stocks, businesses and real estate, two professors say in an article being published today in Tax Notes, an influential tax policy journal.

The potential for abusive reporting in this area, particularly for stocks, "is virtually unlimited," according to the authors, who outline five ways that the law encourages cheating. They added that opportunities to cheat also abound in investment real estate, "where tax-free, like-kind exchanges are increasingly common."

Congress could easily reduce this cheating to a minor problem through changes in tax laws that, the professors wrote, would apply the same rules to those harvesting capital gains that now apply to workers, home owners and parents.
Congress has cut overall financing for audits except for the Earned Income Tax credit for the working poor, which critics have said is rife with fraud. But the estimated $29 billion that is lost because of cheating on capital gains is more than four times the highest estimate cited by Congressional lawmakers for losses in the Earned Income Tax credit, most of which the National Taxpayer Advocate has shown is not related to cheating. Math errors and disputes between estranged parents over who may claim a child for the credit account for most of the disputes, and most of those who challenge denials eventually receive the credit.
(Source: New York Times (Emphasis added.))

In other words, the IRS puts folks like Enron's management team on the honor system and spends its time auditing the janitorial staff's tax returns.


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