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IRS Audits Finally Reversing GOP Bias for Wealthy

December 23, 2009

Score one for working Americans. After enduring both the worst economic downtown and steepest income inequality since the Great Depression, new data from the Internal Revenue Service revealed that lower and middle class taxpayers are being audited at lower rates than the wealthy. And that may finally signal a roll back of the kid gloves treatment for the rich which followed the successful Republican war on the IRS in the 1990's.
As the AP reported, in its efforts to recover more than $300 billion in revenue lost to cheating, last year the IRS was less likely to audit those earning below $200,000 a year:

IRS enforcement numbers, released Tuesday, show that returns under that amount have a 1 percent chance of getting audited.
Returns showing income of $200,000 and above have a nearly 3 percent audit chance. The percentage jumps to more than 6 percent for returns showing earnings of $1 million or more...
The number of audits jumped 11 percent from 2008 to 2009 for returns with earnings of $200,000 or more, but rose 30 percent for returns showing earnings of $1 million or more. For those under $200,000 the number of audits remained steady.

That's a far cry from a decade ago. Then, after the anti-IRS jihad led by Phil Gramm and Congressional Republicans, the agency put working Americans in its crosshairs.
As David Cay Johnston describes in his book Perfectly Legal, the GOP during the Clinton administration waged an all-out war on the IRS, turning the priorities for auditing Americans upside-down. As Senator William Roth's Finance Committee held hearings in 1997 and 1998, Mississippi's Trent Lott and Alaska's Frank Murkowski decried the IRS' "Gestapo-like tactics." Don Nickles of Oklahoma raged, "The IRS is out of control!" Congress went on to pass and Bill Clinton signed the IRS Reform and Restructuring Act in 1998.
Even as IRS Director Charles Rossotti warned Congress about an epidemic of tax cheating which had then reached $195 billion a year, Senator Gramm in May 1998 denounced the agency. Peddling myths of jack-booted IRS agents tormenting American tapayers, Gramm called on Rossotti to fire his 50 worst employees. Gramm concluded:

"I have no confidence in the Internal Revenue Service of this country. You do not have a good system. This agency has too much unchecked power."

As the New York Times recounted that spring, the plan to gut the IRS advocated by Phil Gramm and his allies was a popular political gambit, but almost certain to create incentives for tax evasion:

Mr. Gramm spoke at length of how he had ''no confidence'' in the I.R.S., remarks that were in sharp contrast to those of every other senator, who emphasized that the majority of I.R.S. workers were honest and most taxpayers law-abiding.
A variety of tax experts have said in recent weeks that attacks on the I.R.S., which polls show are a potent device to win votes and contributions for Republicans, give comfort to tax cheats and discourage honest taxpayers.

Which, of course, is exactly what happened.
Those reforms in essence gave wealthier Americans carte blanche to cheat and fundamentally undermined tax fairness in the United States. Within one year, property seizures for unpaid taxes dropped by 98%. Liens were sliced by three quarters and levies on bank accounts by two-thirds. Johnston describes (p. 134) the overnight shift of tax policing onto poorer Americans:

In 1999, for the first time, the poor were more likely than the rich to have their tax returns audited. The overall rate for people making less than $25,000 a year was 1.36%, compared with 1.15% of returns by those making $100,000 or more...Over the previous 11 years audit rates for the poor had increased by a third, while falling 90 percent for the top tier of Americans.

By 2007, the amount of federal revenue lost to fraud and unpaid taxes catapulted to $300 billion. When Congressional Democrats sought expanded funding for the IRS to help stem the losses, the Bush administration and its GOP allies stopped the effort dead in its tracks.
And still the conservative crusade to save the rich continued. That same year, the IRS shed almost half of the 345 lawyers assigned to monitor the gift and estate taxes paid - or not paid - by those with some of the largest fortunes in the United States.
That effort to gut the IRS was simply class warfare by other means. Unable to permanently repeal the estate tax, the Bush administration instead sought to cripple enforcement. As the New York Times reported:

Six I.R.S. estate tax lawyers whose jobs are likely to be eliminated said in interviews that the cuts were just the latest moves behind the scenes at the I.R.S. to shield people with political connections and complex tax-avoidance devices from thorough audits.
Sharyn Phillips, a veteran I.R.S. estate tax lawyer in Manhattan, called the cuts a "back-door way for the Bush administration to achieve what it cannot get from Congress, which is repeal of the estate tax."

According to the Times, deputy IRS commissioner Kevin Brown confirmed the cuts, but claimed that "because far fewer people were obliged to pay estate taxes under President Bush's legislation." Brown also rejected as "preposterous" the notion that IRS looked the other way when it came to rich tax cheaters.
Sadly for Brown, the data suggests otherwise. Six years ago, the I.R.S. reported that 85 percent of large taxable gifts it audited shortchanged the government. And as the Times details:

Over the last five years, officials at both the I.R.S. and the Treasury have told Congress that cheating among the highest-income Americans is a major and growing problem.

Which comes as no surprise. As the Center for American Progress noted, the Bush tax cuts delivered a third of their total benefits to the wealthiest 1% of Americans. And to be sure, their payday was staggering. As the Center on Budget and Policy Priorities detailed, by 2007 millionaires on average pocketed $120,000 from the Bush tax cuts of 2001 and 2003. Those in the top 1% stashed an extra $45,000 a year. As a result, millionaires saw their after-tax incomes rise by 7.6%, while the gains for the middle quintile and bottom 20% of Americans were a paltry 2.3% and 0.4%, respectively. (Another CBPP study demonstrated that the Bush tax cuts accounted for half of the mushrooming deficits during his tenure in the White House.)
And as the New York Times uncovered in 2006, the 2003 Bush dividend and capital gains tax cuts offered almost nothing to taxpayers earning below $100,000 a year. Instead, those windfalls reduced taxes "on incomes of more than $10 million by an average of about $500,000." As the Times revealed in a jaw-dropping chart, "the top 2 percent of taxpayers, those making more than $200,000, received more than 70% of the increased tax savings from those cuts in investment income." So it should come as no surprise that the income share of the 400 richest Americans doubled over the past decade.
But while the IRS is finally showing signs of reversing years of preferential treatment for the rich, the Republican Party is more committed than ever to ensuring windfalls for the wealthy. Thanks to Republican obstructionism in the Senate on their behalf, the estate tax, which in 2009 will impact only 1 in 500 estates while generating tens of billion in revenue, will temporarily expire for one year after December 31. Rep. Louie Gomert (R-TX) suggested that's the way God wants it:

"Jesus never advocated the government go steal. He said 'you do it. Do it with your own money, don't steal it from somebody else.' And that is why this should not pass."

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Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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