THE BOOK--Playing The Percentages In Baseball

My first reaction is to wonder how this could be profitable for the government (i.e. worth putting in the costly effort to change the law).  As I just hinted, there’s the mostly up front cost of restructuring the system and changing the law.  There’s also the cost of actually paying people who are audited.  In return they get more accurate tax returns from the lowest brackets of the spectrum.  The reason why only the lowest brackets would be interested is because there reaches an income where the amount of safely and easily hide-able dollars exceeds the total the money the IRS pays you minus the intrinsic cost of being audited.  Perhaps a clearer way of stating that is the intrinsic cost of being audited increases with income (high income person’s time is more valuable and there is greater risk).

You could simplify it into this equation:

IRS return - intrinsic cost = Decision to apply for auditing

This was a convoluted post, hopefully I’ll have time to come back and clean it up later.

"But, what if every audit meant 3000$ in the auditees pocket?  Now, isn’t it more likely you might be a bit more careful with your taxes? “

I don’t get that at all.  First of all, you get the $3,000 even if it turns out that you made a mistake and owed the IRS money?  Huh?  Or only if you are clean?

If I knew that I was going to get $3,000 if I am audited, wouldn’t I try and raise as many red flags as possible in order to GET audited, as long as I was sure that I wouldn’t owe more than another $3,000?

I don’t get this idea at all.  Someone is going to have to explain how this would be a good thing.

The only deterrent to cheating on your taxes or making a mistake through a lack of thoroughness is more auditing and stiffer penalties if you get caught.  Paying people $3,000 per audit is supposed to increase the number of audits?  If that is true it is a really DUMB way to do it.  How about you just increase the number of audits and NOT pay anyone?

How about we just pay people when they get caught committing crimes and then no one would be opposed to “getting tough on crime?” Since people generally don’t like strict enforcement of, say, drug and prostitution laws, we can pay people $3,000 when they get arrested for a minor drug or prostitution related crime.  How’s that?

The article was fairly long but I read the first couple of paragraphs and Tango’s paraphrasing.  From what I read, I’d have to agree with MGL that this actually leads to an incentive for people to cheat up to $3K worth of their taxes.  From the Govt side of the ledger it might make sense, but from the taxpayer side it makes no sense as described.
vr, Xei

Many audits result in a reduction in tax.  People make mistakes both ways.  The last two times the IRS disagreed with me (neither was a real audit, both were my mistake) resulted in a split decision: last year, I owed more, four or five years back, I overpaid.  Back in the bad old days, my father, an aggressive but always legal filer used to get audited every year, literally.  About half the time, they’d end up reducing his bill.

As for the idea, no, I don’t like it.  But then I think the IRS has become a bunch of friendly panda bears, I don’t cheat, and I am very good with forms.  Ymmv etc etc.

You could easily get rid of the incentive to cheat.  If there was some reason for the audit—their records didn’t match yours—and that reason turned out to be accurate, there is no payment. 

For instance, I know someone who got audited because the government discovered she forgot to report some income.  It turned out to be correct.  So, just don’t pay her for that audit.

The payment would be issued only when you’re clean, or when the audit is based on profiling (for instance, you own an expensive house, but haven’t declared much income for 20 years.  If it turns out that there’s an explanation—an inheritance, say—you get the $3000.)

And it wouldn’t have to be $3000—it could be $100 per hour of your time, or some such.

The way I see this working is that you can request a voluntary audit -and get paid $3000.  To limit the cost to the government, you can only request so many of these, maybe five over a lifetime.  And you have to have filed tax returns for five years to do this.

Plus there are still random involuntary audits.

So people in the lower tax brackets have an incentive to file taxes, and file them accurately.  If they do this, they can request an audit (only every so often), get a clean bill of health, and collect $3000.  The IRS concetrates on the high flyers (apparently now they do the opposite), since they know the low end taxpayers have more of an incentive to cooperate.

I keep looking for data on audit yields, but can’t find any.  This proposal essentially rests on the idea that the average audit yields more than $3,000, but I have no idea if that is correct.  And, really, it’s aimed at at increasing the political acceptance of high audit rates.  Why do people oppose high audit rates today?  Because most people do NOT cheat on their taxes (knowingly, at least), and an audit is a huge hassle.  If people are confident that if they are audited and found to be innocent they will not suffer consequences (as they do today in time, hassle and potentially legal fees), they will be more accepting of audits, thus leading to the government performing more audits.  This leads to either increased voluntary compliance or increased recovery amounts.  I think Tango has it right when he says it all depends on the amount of cash offered and the percentage of returns audited.

There are two classes of people or companies:
1. those who are honest
2. those who are not

Both groups oppose audits (one because of time and effort, and the other for legal reasons).

The IRS is, apparently, pressured by Congress (through the power of the purse I suppose) to limit audits because their constituents (honest or not) are equally opposed to audits.

Even if you want to sell the idea to the honest people that it’s important to do these audits because it benefits the greater good, they won’t listen, because they won’t trust the IRS.

***

Now, once you have a larger scale auditing system in place, the honest ones, cognizant that they may be monitored, have to do a more diligent job of creating an accurate return.  That, as a byproduct, might mean more money to the IRS from the outset.

The dishonest ones, still wanting to be dishonest, will start reporting more undeclared revenues.

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It’s not that the payout is going to cause people to be more honest, but that the number of audits increasing will do that.  The payout is going to make people more accepting of their congressmen to give the IRS more money to do this.

I dunno, Tango. 

You’re going after public outrage (currently at audits, which apparently suck for those involved) with a measure that seems to me to be likely to generate public outrage (more governmental wasting of taxpayer dollars!  Those cretins!  Damn IRS.  Get off my lawn!).

I don’t really see how it would help.

I think a simplified tax code (or system) would help out.  No individual or family should have to spend 10+ hours doing their taxes with the high likelihood that they made a mistake either in their favor or against.
vr, Xei

Simplicity is best, if it can be done without sacrificing clarity.  That’s the devilish detail.  Clarity trumps all.  If you can simplify w/o creating a muddle (or rather more of a muddle), phenomenal, do it of course.