By Ananda Shorey
WASHINGTON – For the first time in modern history, low-income Maryland taxpayers have a greater chance of being audited than higher-income individuals, according to a study released this week.
The Internal Revenue Service historically has focused its auditors on the financial activities of wealthier taxpayers because they are generally the ones who have more to hide and better opportunities to hide it, but that is no longer the case, according to the study.
The study, released by the Transactional Records Access Clearinghouse, said that 1.1 percent of Maryland taxpayers making less than $25,000 were audited in 1999 compared to .15 percent of middle-class individuals making between $50,000 and $100,000.
The shift in audit targets from the relatively rich to the relatively poor was due mainly to a congressional mandate that put pressure on the IRS to reduce the error rate in the Earned Income Tax Credit program, a special tax benefit for low-income Americans.
The IRS was ordered by the National Commission on Restructuring the IRS in 1998 to review Earned Income Tax Credit filers. It had no other option, said the senior counselor of the National Taxpayers Union, who was on the commission at the time.
“I think the IRS has responded to the criticism for lowering the error and fraud rate in the Earned Income Tax Credit program,” said David Keating, the senior counselor.
Increased congressional pressure doesn’t justify the fact that lower income earners are being audited more than those who are more affluent, said Rep. Benjamin Cardin, D-Baltimore.
“Public confidence is key and you can’t expect that you will enjoy large public confidence if you have such a large differential,” said Cardin, a member of the House Ways and Means Committee, which oversees taxes and fees.
An IRS spokesman, Don Roberts, said the TRAC numbers do not tell the whole story. Even though the study makes it seem like people who make less money automatically have a greater chance of being audited, that is not the case, he said.
“Sometimes numbers don’t explain themselves,” Roberts said. “It is not because of their income, it is because of a particular tax benefit that they are getting.”
The Earned Income Tax Credit can only be claimed by workers within the income limitations set for workers without children, workers with one qualifying child and workers with two or more qualifying children, he said. People who fall into a low-income bracket but do not claim or qualify to claim the tax benefit do not have a greater chance of being audited.
Although the Earned Income Tax Credit has been around since 1975, Roberts said it was not until the program was expanded in 1997 and 1998, when Congress gave the IRS new enforcement tools and appropriations, that the agency was able to really address noncompliance issues in the program.
The IRS also has recently targeted taxpayers who fail to file forms for compliance review, he said. Since their incomes are unknown, the IRS classifies these cases as being in the lowest income category, raising the numbers of lower-income earnings.
Roberts said when cases under the Earned Income Tax Credit program and non-filer programs are factored out, the number of all audits has declined.
Whatever the reasons, Cardin said, the situation is unacceptable. And he said the fact that the IRS has decreased the number of overall audits only adds to the problem.
“Unless you audit a critical number, you run the risk that people will not be in compliance,” he said.
Although the IRS has not enjoyed a great deal of support for increased appropriations, he said, it still has to change procedures.
“The public is not going to accept what the IRS is doing,” he said, “and the IRS is going to have to modify their policies.”