When I was a kid, my mother used to start all serious conversations with some remark about “The only certainty in life is death and taxes”. I did not like hearing this, because it was usually followed by some explanation of why some exciting planned trip to the beach was not going to happen. Now I learn she was wrong (one of only a few times, I must admit.)

Turns out for an astonishing number of Americans, even having to pay taxes is not certain. The IRS estimates that individuals and corporations fail to pay one dollar out of every six that should have been paid to the federal government.^[1] This is enabled by our Congress who cut funding for law enforcement audits and collections.

Starting in 2010, Congress has reduced the IRS law enforcement budget by millions of dollars each year. It is now only 80 % of what it was in 2010. The number of employees was also reduced by one fifth. ^[2] In 2019 the IRS had 8,004 auditors – less than it had back in 1953 when the economy was about one-seventh its current size.^[3],[4],[5] As a consequence, three major bad things happened.

First, the IRS has reduced audits of corporations with assets over 10 billion by 50% over the past ten years.^[6] Collections have dropped considerably.

Second, high wealth individuals are being allowed to escape punishment. In 2013, the House Committee on the Budget (not the IRS) argued for more money for IRS law enforcement and testified that for every hour invested auditing individuals who made more than five million dollars per year, $4,545 in additional taxes due was identified.^[7] Seventy percent of due-but-unpaid individual taxes are owed by the top 1% in income.^[8] Congress cut the enforcement budget anyway, and audits of individuals with $10 million annual income have been reduced 75% since.^[9]

According to a May 29, 2020 report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS has identified but does not have the staff to audit, more than 879,415 known wealthy individuals who illegally did not file tax returns between 2014 and 2016 – and these individuals owed at least $46 billion in taxes.^[10]

Third, a known group of likely tax cheaters is not investigated. These are people who own their own company or are self-employed. IRS experience shows that about one-third of the self-employed who were audited had cheated.^[11] After they got caught, the guilty showed an average of 44% increase in reported income over the next 3 years! ^[12] In North Carolina, where I live, almost half a million workers are self-employed – 9% of all paid workers.^[13]

All of this has two consequences. The first is that our citizen's faith in the government doing its job is undermined. This goes way beyond collecting taxes and extends to a reduction in trust in Congress's willingness to protect our food and water supply, voting, and governmental employee misconduct. This failure causes social rot from within.

This leads to the second consequence. According to the Congressional Budget Office’s own website “the IRS estimated an average of $441 Billion (16%) of federal taxes owned annually for 2011, 2012 and 2013 was not paid in accordance with the law” ^[14],[15] Even using 7-year-old numbers we can see that If our tax law enforcement were fully funded, the income would reduce our federal deficit by at least 4.4 Trillion dollars over 10 years^[16]– and pay more than the full bill for federal Covid-19 assistance.

Few people understand how all of this directly impacts North Carolina. This is how it works: forty-one states (including North Carolina) use your federal tax return numbers to calculate your state taxes due.^[17] So for every dollar of income not reported at the federal level (1 in 6), they are also automatically not reported at the state level. Slightly more than half of North Carolina’s state budget comes from individuals and corporations state tax returns based on federal taxes.^[18] This means we lose around 16% of state income tax revenues.

Because North Carolina depends on the IRS to catch cheaters, and Congress has handcuffed the tax law enforcement people, we lose twice – less federal money to pass along to us, and less money collected in state taxes. In both cases, if this were to be fixed, the taxes paid by honest people would not rise. Just those from people caught breaking the law.

Many folks are arguing for more money for law enforcement to protect our citizens. That argument should apply to the IRS as well.

On January 3, our nation starts a new congressional session. What are you going to do about this? You could pick up your phone and call your elected officials and share this information. Forward this email to them. Post it on your social media page.

If you don't you will be paying someone else's taxes for the rest of your life.

[1] https://www.brookings.edu/blog/up-front/2019/04/09/how-big-is-the-problem-of-tax-evasion/
[2] https://www.govexec.com/management/2020/02/trumps-budget-seeks-increase-funding-internal-revenue-service/163087/
[3] https://www.propublica.org/article/how-the-irs-was-gutted
[4] https://www.cbo.gov/publication/56467
[5] https://www.documentcloud.org/documents/6430680-Document-2019-9-6-Treasury-Letter-to-Wyden-RE.html
[6] https://budget.house.gov/publications/report/funding-irs
[7] https://budget.house.gov/publications/report/funding-irs
[8] From an article by Mr. Larry Summers, former Secretary of the Treasury of the United States. https://www.washingtonpost.com/opinions/yes-our-tax-system-needs-reform-lets-start-with-this-first-step/2019/11/17/4d23f8d4-07dd-11ea-924a-28d87132c7ec_story.html
[9] https://www.usatoday.com/story/money/2020/01/31/taxes-2020-audits-most-likely-happen-these-two-groups/4552393002/
[10] https://www.treasury.gov/tigta/auditreports/2020reports/202030015fr.pdf
[11] https://www.cpapracticeadvisor.com/tax-compliance/news/12409241/32-of-selfemployed-workers-admit-they-under-report-taxable-income
[12] https://www.imf.org/en/Publications/WP/Issues/2019/10/11/Do-Audits-Deter-or-Provoke-Future-Tax-Noncompliance-Evidence-on-Self-employed-Taxpayers-48703.
[13] https://jocoreport.com/453816-north-carolina-workers-are-self-employed/
[14] https://www.cbo.gov/publication/56467
[15] A second estimate was prepared by the IRS for 2008-20010 (the height of the “great recession”, when income was down greatly. It found an under-payment of $406 Billion. https://www.irs.gov/pub/irs-soi/p1415.pdf
[16] $441,000,000,000 x 10 years = $4,410,000,000,000 ($4.4 Trillion dollars).
[17] https://www.investopedia.com/financial-edge/0210/7-states-with-no-income-tax.aspx
[18] https://www.ncjustice.org/wp-content/uploads/2018/12/budget-primer-2019.pdf page 4