Don’t any statisticians work for the IRS?

A friend asks the above question and writes:

This article left me thinking – how could the IRS not notice that this guy didn’t file taxes for several years? Don’t they run checks and notice if you miss a year? If I write a check our of order, there’s an asterisk next to the check number in my next bank statement showing that there was a gap in the sequence.

If you ran the IRS, wouldn’t you do this: SSNs are issued sequentially. Once a SSN reaches 18, expect it to file a return. If it doesn’t, mail out a postage paid letter asking why not with check boxes such as Student, Unemployed, etc. Follow up at reasonable intervals. Eventually every SSN should be filing a return, or have an international address. Yes this is intrusive, but my goal is only to maximize tax revenue. Surely people who do this for a living could come up with something more elegant.

My response:

I dunno, maybe some confidentiality rules? The other thing is that I’m guessing that IRS gets lots of pushback when they hassle rich and influential people. I’m sure it’s much less effort for them to go after the little guy, which is less cost effective. And behind this is a lack of societal consensus that the IRS are good guys. They’re enforcing a law that something like a third of the people oppose! But I agree: given that we need taxes, I think we should go after the cheats.

Perhaps some informed readers out there can supply more context.

7 thoughts on “Don’t any statisticians work for the IRS?

  1. Actually, there are lots of statisticians who work for the IRS, but they are mostly focused on developing economic statistics, and separated from the division that handles enforcement. They do get a regular sample of tax returns, but as I understand it that data is protected under various confidentiality laws.

    But probably more relevantly, preventing tax enforcement is a position with a lot of support among certain influential constituencies.

  2. Here's how it normally works.

    As long as IRS gets any kind of documentation indicating that you made any income during a given tax year, they make a note that they expect you to file taxes.

    If you don't file taxes by April 15 the following year, they start sending you reminders.

    At some point, typically more than a year after you missed the deadline, they end up filing a 1040 for you (but, most likely, missing all the deductions, tax credits, etc.)

    If you still owe money to them based on the result of that calculation (and remember that you've been paying taxes through paycheck withholding), they can put a lien on your property. If you don't, they'll send you a check and forget about it.

    In this situation, it seems that the story is specifically about NYC _city_ taxes, not federal taxes. The agency that collects NYC city taxes is not IRS, it's something much more local than that.

  3. I was told recently by a CPA friend that the IRS has algorithms to detect filings that are inconsistent with someones income (e.g. making large donations or gifts if you have very little income), which can trigger an audit. It seems strange that they also wouldn't have algorithms to detect failure to file or unlikely incomes given a set of variables.

    I'm surprised the IRS do not issue prefilled 1040s for people to check, which many countries already do, rather than put the burden on the citizens to fill out the forms. In Norway you don't even have to file your taxes unless you have changes to the prefilled form.

  4. I think that two main reasons are itemized deductions (lots of people itemize, and IRS has no way of knowing everything that you want to deduct), and dependents (they can make an educated guess as to the number and age of your dependents, but they can never be sure).

  5. People always say that it's illegal to not file a tax return. That's not true. It's illegal to owe taxes and not pay them. But if you don't owe, or the IRS owes you a refund, they don't care. In the latter case, they're happy to keep your money.

    It's true that if they don't have withholding commensurate with reported income/gains, they'll calculate tax owed very aggressively. In some cases, nonsensically, really. For example, all proceeds from securities sales will be counted as capital gains with no accounting for losses or the initial investment. If you bought and sold the same block of shares over and over again, each of the sales will be added to the sum of presumed capital gains and they'll calculate a big tax bill.

    But, anyway, this is part of why the IRS doesn't simply track the lack of filed returns and take action on them. It's likely that the vast majority of non-filers are people with so little income that they will have zero taxable income, and people who have only work income with withholding that is in excess of their taxes owed.

    There is absolutely no penalty, legal or financial, for not filing a tax return if one doesn't owe any taxes. Again, though, if it can be construed that one owes taxes, and it's not a trivial amount of money, then the IRS will file on your behalf and send you a tax bill with penalties, as well as filing a tax lien…and you'll have to file a correct return documenting that you don't owe. But for workers with only work income and who have sufficient withholding, they easily know if you're likely to owe or not; if it's the latter, they'll ignore you.

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