By Francis Koster

When I was a kid, my mother used to start all serious conversations with some remark about, “The only certainty in life was 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.  

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 $1 out of every $6 that should have been paid to the federal government. This is enabled by our Congress, which cut funding for law enforcement audits.

Congress has reduced the IRS law enforcement budget until it is now only 80% of what it was in 2010. The audit staff has been reduced by one third. 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. As a result, 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. Collections have dropped considerably.

Second, high wealth individuals who did not pay taxes are being allowed to escape punishment. In 2013, the House Committee on the Budget testified that for every hour the IRS invested auditing individuals who made more than five million dollars per year, $4,545 in additional taxes due was identified. Seventy percent of due-but-unpaid individual taxes are owed by the top 1% in income. Audits of individuals with $10 million annual income have been reduced 75%.

According to a May 29 report by the Treasury Inspector General, the IRS has identified more than 879,415 known wealthy individuals who illegally did not file tax returns between 2014 and 2016. These individuals owed at least $46 billion in taxes. Due to lack of congressional funding, not enough staff exists to chase them!   

Third, a known group of likely tax cheaters is under investigated. IRS experience shows that about one-third of people who own their own company had cheated.  After they got caught, the guilty showed an average of 44% increase in reported income over the next 3 years! In North Carolina, almost half a million workers are in that category – 9% of all paid workers.   

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 loss of trust in protecting our food and water supply, voting and law enforcement. This failure causes social rot from within and threatens our democracy. 

The second consequence is that your taxes get raised to make up for those not paid by cheaters. According to the Congressional Budget Office’s own website, “The IRS estimated an average of $441 billion (16%) of federal taxes owed annually for 2011, 2012 and 2013 was not paid in accordance with the law.” Even using these seven-year-old numbers, we can see that I=if our tax law enforcement had not been cut, the income would have reduced our federal deficit by at least $4.4 trillion over 10 years. 

Few people understand how all of this directly impacts North Carolina. This is how it works: 41 states (including North Carolina) use your federal tax return numbers to calculate your state taxes due. Every dollar of income not reported at the federal level (one in six) reduces reported income at the state level. This amounts to 16% of state income tax revenues lost.

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. Every dollar invested in the IRS results in $5 in new tax collections.

Many folks are arguing for more money for law enforcement to protect us from theft and violence. That argument should apply to the IRS as well.  

On January 3, our nation starts a new congressional session. Now is a good time to speak up.   

Koster, who lives in Kannapolis, did his graduate work with a focus on threats to the basic life-support systems of air, water, food and fuel. He spent a majority of his career as chief innovation officer in one of the nation’s largest pediatric health care systems.