I believe that one of the best ways to hold the income tax in check is to have the IRS audit every single taxpayer. If that makes you terribly angry, hold your horses! You might be thinking to yourself, "The last thing I want is for me or my dear, old mother to have to face the wrath of the IRS!" And that is 100%, Grade-A reasonable. I detest the personal income tax and I want it to be gone forever. However, with only one presidential candidate calling for any income tax reform, the chances of it disappearing altogether are somewhat remote.
With that sad reality in place, I've been researching and considering more realistic ways to make the income tax less punitive and less damaging to our country. And one of the answers — believe it or not — is to require the IRS to audit everyone. Don't believe me? Well, let's see if I can't use this article to elicit a resounding, "Dang it, he's right!" from you.
Forced audits and favorable rules
Since 2009, the hot enforcement trend has been undisclosed foreign accounts. The first program, the 2009 Offshore Voluntary Disclosure Initiative, was aimed primarily at account holders at UBS (Union Bank of Switzerland). The IRS considered the program a huge success. It didn't take long for the IRS to realize that there was much more money to be had — UBS was far from the only bank involved, and Switzerland was in no way the only country at fault. So, the IRS created a new 2011 Offshore Voluntary Disclosure Initiate, keeping in mind that:
- Non-compliance was huge, not just with account holders in Switzerland
- Not everyone was trying to do anything illegal
Because so many people were inadvertently making mistakes on their tax returns, the IRS created an "opt-out process," by which taxpayers could volunteer to be audited and demonstrate that they did not willfully fail to report foreign accounts or income. These people were given a chance to show that they had made a very honest mistake on their tax returns. This right here is something I can definitely be in favor of.
The IRS shoots their own foot
The 2011 OVDI ended, and for a few months there was — once again — no official disclosure program. If you had failed to meet the deadline, it kind of felt like you were left high and dry. The IRS, realizing the number of people they had marooned by closing the program, made a new Offshore Voluntary Disclosure Program (OVDP) in January of 2012. Changed from an initiative to a program, the 2012 OVDP was here to stay. And, just like the former initiative, the program included an opt-out alternative.
Yet, something no one saw coming (it took me by surprise too) happened.
Enforcing the tax code was more complicated than the IRS thought!
The IRS was caught completely unaware by its own code! As it turns out, the IRS was just finding out that the US tax code is unlike any other tax system in the world (for some context on how insane US taxation of foreign income is, read this story). Because of the mini-audits of the regular OVDP and the full audits of the OVDP with opt-outs, the IRS quickly ran out of manpower to handle the workload they had created. There's some kind of wonderful irony happening here.
Because so many taxpayers said, "Audit me," the IRS was forced to augment the OVDP. Their altered "Streamlined OVDP processes" only take three years of noncompliance into account, contrasting the full program's eight-year window. Instead of egregious penalties, the fines were knocked down to 5% for domestic filers, and 0% for expats.
Now, don't think for one minute that the IRS has gotten more "chill" about the penalties for the streamlined process because it has a heart. It does not. They changed the rules because they simply didn't have the staff to handle the most complicated tax system in the world. It took a gaff on their part to see their system as taxpayers do. And, having a taste of the overwhelming system they enforce, they immediately created a way to not have to deal with it.
What's that line our mothers always told us about getting a taste of our own medicine?
The IRS thinks you owe them your time
Because the IRS gets your tax compliance labor for free, we can assume that they don't value it all that much. According to Form 1040 instructions, the IRS is just fine with making the average taxpayer give up 13 hours of their time and being saddled with tax preparation costs.
But what about taxpayers with more complicated affairs? After all, doesn't Form 5471 take weeks to complete? Well, the IRS gets your labor for free, so of course they don't mind!
Is there any way to get the IRS to think our time might actually be valuable to us? Well, one way would be to force them to do the work. Why do we have to pay high taxes AND devote huge efforts into tax compliance? Can't we just pay our absurdly high taxes and be left alone?
What would happen if everyone was audited?
Back in 1913, when the income tax became permanent with the Federal Revenue Act of 1913, every taxpayer was audited. The income tax only applied if you made more than $66,000 in 2010 dollars. Due to a simple tax code — where the top marginal tax rate was a scant 7% — and a limited number of taxpayers, it was entirely feasible to audit each taxpayer. Back in 1913, the tax code was simple and straight-forward enough that it didn't take hours upon hours to come to even a simple resolution.
But look what happens now. The IRS forces everyone to "volunteer" their time to make a document that the IRS can accept and review later (here's an article on the misnomer of "voluntary compliance"). The compliance costs are offloaded onto taxpayers and we're expected to receive it like it's a good thing!
Because the IRS doesn't have the same incentives to keep the tax code simple, it can continue to make it more complicated. By now, the IRS has realized that the more complicated the tax code is, the more money they can make. The more pages there are in the IRM (Internal Revenue Manual), the greater the likelihood of a taxpayer breaking a rule and having to pay hefty fines. If the IRS had to pay a proportional price, if it had to prioritize its resources the same way a taxpayer does, I could guarantee our tax code would be so simple that the IRS could audit everyone.
Forced audits of each individual taxpayer would necessitate simplicity. These per-person audits forced the IRS to change its Offshore Disclosure Program, so why wouldn't it work for the income tax as well? Don't we all deserve a bit more clarity?
Right now, when the IRS forces us to do the vast majority of the dirty work without any sort of compensation, they have time to develop new busywork that requires our labor while simultaneously working against us. Meanwhile, the IRS finds a nice way to balance an audit-rate percentage that scares people into compliance, but doesn't create an undue amount of work for them. Considering that the IRS works through fear and intimidation, it's necessary we ask ourselves an important question – is this any way to run a country?
Additional benefits to kicking the IRS into shape
If the IRS audits everyone, wouldn't that mean tax evasion would pretty much stop altogether? Why are we wasting scarce Department of Justice resources with the 3,000 or so tax evasion indictments per year?
If everyone was audited every year, small mistakes could be corrected before they got out of control. If everyone was audited, there would be less of a Russian Roulette style of tax administration which forces you to pull a trigger and frantically hope that it doesn't kill you. Everything being said, you would know your taxes were 100% correct as you paid exactly what the IRS told you to.
Demand the US Government have actual skin in the game. Demand a change to the law that forces every taxpayer to be audited! Or get rid of the personal income tax. That would work too.