Here we go again!

Another article in the Wall Street Journal that indicates it has stopped providing analysis and depth in news reporting. And, you can bet that a bunch of other papers will use the same basic facts that will mislead you.  (Since I wrote that sentence, it has come true- I’ve added the “pack’s” comments below.)

What am I talking about? Here’s the headline from page 2 of the Wall Street Journal. “IRS Personal Tax Audits Continue to Fall…”

 

Yes, WSJ, that title is misleading.  But, the Wall Street Journal wasn’t the only one befuddled.   A few days later (while this post was gestating in the queue), the Washington Post chimed in via their editorial page.

 

I do admit that the Washington Post was a little more knowledgeable in their editorial.  (They- without my prodding- actually cited one [yes, just one] of the items I will bring up shortly.  Not like the last Wall Street Journal article that I critiqued a fortnight ago, where my analysis was employed by the Washington Post without attribution.)

Back to why this article rankled me.

Let’s consider some true facts.

Until recently, the IRS budget has been starved by the GOP. Ostensibly it was retribution for (yet another NOT ‘true fact’) the IRS’ examination of the plethora of “charitable foundations” that were being formed to take advantage of the SCOTUS’ (Supreme Court of the United States) Citizen’s United decision. Where SCOTUS ruled that corporations were ‘people’ entitled to express their opinions- in other words, to fund political ads for various candidates. (Yes, that also means anonymously. Although many folks- including me- diligently seek out who these ‘benign’ sounding entities really represent.)

And, that starvation- returning the IRS budget to the level it had a decade previous (despite the tremendous increase in the number of returns processed)- meant the agency had fewer resources and staff (30,000 fewer!) that could discern if folks (or the ‘fake’ folks, corporations) were accurately reporting their income and expenses. So, the number of audits, seeking out ‘tax shortages’ [i.e., underreported earnings, meaning taxes are due and owing- totalling in the billions of dollars (purported to be more than $ 1 trillion over the next decade)] dropped precipitously. As a matter of course, it meant the odds of being examined by the IRS were about ½ of what they were before the budget cuts began (back in 2010).

This past year’s budget finally provided the IRS more money. Still not enough (it’s 20% below the 2010 levels, in adjusted dollars), but more money. Which meant that the IRS could up its examination and enforcement activities.

One more key fact. The number of electronic returns. Because those filing electronically are far less likely (close to nearly impossible) to make arithmetic errors that would necessitate an audit. Back in 2010, about ½ of all returns were filed electronically. By 2017, that percentage had grown to 70% of all returns. And, by last year, it climbed to almost 72%. All of which mean that the number of arithmetic errors that need correction should also drop.

(OK. Let me be perfectly sinister here. I can also state that many folks who want to cheat would file by paper- because there is no computer making sure they don’t make arithmetic errors, don’t skip critical lines that must be completed, etc.)

That’s the deep background.

Here’s another true fact. The IRS audited 0.59% of all personal returns in FY 2018- and audited even less (0.45%) during FY 2019. Which is a dramatic downturn from the audit rate of 2010 (1.1%). Which meant that ever since the dawn of the last decade, the rate of audits followed a steady decline.

But, now, let’s delve a whole lot deeper, so we can truly analyze  the whole situation.

For Christmas 2017, TheDonald and the GOP Congress (both House
and Senate) provide a fully-loaded Christmas present to corporations and the 1%-ers. You remember- that mis-named “Tax Cut and Jobs Act”. (The TCJA, where only the first two words are true!) Which cut the theoretical (and only paid by small businesses) 35% corporate tax rate to (the still theoretical, except for small businesses) 21%. And, cut the tax rates for the rich (sure, it said for all folks- but if you read my blog, you know the real data), as well.

One of the key factors of the TCJA was the elimination of itemized deductions. Oh, sure, they are still allowed- but few, if any of the middle or lower classes, can use them. After all, the old standard deduction of roughly $6K [singles] or $ 12K [marrieds] was combined with the personal exemption of roughly $4K per person in the household into a “new and improved” (did you buy that bridge in the Mojave Desert yet?) standard deduction of $ 12K [singles] or $ 24K [marrieds]. Oh, yeah, your state/local/property tax deductions are also limited to a total of $ 10K,

So, given that fact, you should not be surprised that the number of folks who itemized deductions on their tax returns have dropped precipitously. And, where- given the tax returns- are folks most likely to underreport? (We tax preparers call that cheating- it is against the law!) On one of two Schedules- either A (the one where folks itemize their deductions) or C (the one’s where gig and the self-employed report their business income and deductions).

Now, let’s look at what happened to the real numbers of those itemizing deductions….

From 2017 to 2018, 28.5 million fewer tax returns included itemized deductions. That’s means almost 2/3 fewer folks itemized in CY 2018 than in 2017.

Given the filings in 2017 (138.9KK) and 2018 (142KK), we can now see if that drop in audit rate is an artifact of how one collects numbers. Because for 2017, some 820K personal tax returns were audited. And, for 2018, the number of folks audited had dropped to 639K.

If we were to assume that half of all audits involved Schedule A queries or those filing by hand, then the audit rate for those more likely to cheat increased in 2018 increased dramatically.

As Paul Harvey used to say.. That’s the rest of the story…  Where one could infer that the IRS is attempting to be as diligent as it can be for personal returns.

(What I did not discuss here, though, was how dilatory the IRS has been in investigating business returns!!!!)