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Congress just cut IRS funding. It costs even more than we thought.
The White House and Congress recently agreed to claw back more than $20 billion earmarked for the Internal Revenue Service. This deal was, ostensibly, part of a grand bargain to reduce budget deficits.
Unfortunately, it’s likely to have the opposite effect. Every dollar available for auditing taxpayers generates many times that amount for government coffers — and the rate of return is especially astonishing for audits of the wealthiest Americans, according to new research shared exclusively with The Post.
A team of researchers at Harvard University, the University of Sydney and the Treasury Department examined internal IRS data for approximately 710,000 in-person audits from 2010 to 2014. Here’s what they found:
These figures take into account any agency resources spent on appeals, collections, etc., as well as the fact that some lucky taxpayers ended up owing no additional money after the audit process was completed.
And even those eye-popping numbers understate how much money we’re leaving on the table by not fully enforcing tax law. That’s because the biggest bang for the buck comes from what happens well after the audit concludes.
In the years after a taxpayer gets audited, they start paying much more in taxes voluntarily. Maybe, post-audit, they stop taking some dodgy deductions (counting a personal car as a business expense, for example). Or they start reporting income they had previously accepted off the books.
These kinds of changes might happen because the taxpayer in question had previously made an honest mistake. Then again, maybe they had been deliberately cheating Uncle Sam, and were chastened by being caught.
Either way: they begin paying more of what they owe.
These additional taxes equal about three times the revenue raised from the initial audit, on average, over the 14 years of data the researchers had access to. So in other words, the biggest returns from doing more audits come from deterrence effects. (That’s why, incidentally, the IRS has historically publicized its big tax fraud cases in the weeks before Tax Day, when most Americans are filing their returns.)
That multiplier — three times as much revenue from deterrence effects as from the initial audit — is relatively consistent across the income distribution, with both rich and poor adjusting their post-audit tax habits significantly. Which still means that in raw dollar terms auditing the rich has bigger payoffs.