Areas with large African-American and Hispanic populations are subjected to Internal Revenue Service enforcement actions at double the rate of the general population, according to a new analysis.
The analysis, conducted by TaxLifeboat, a Web site offering help to taxpayers who are in trouble with the IRS, said the disproportionate ratio of IRS tax compliance measures in areas with large African-American and Hispanic populations stems from the agency’s reliance on increased automation and its decision to continue allocating more resources to enforcement.
The unintended consequence is aggressive targeting of individuals in low-income minority communities without substantial means and education to mount significant challenges, according to the study.
The IRS did not respond to a request for comment.
Some minorities hit with IRS enforcement actions don’t owe any taxes and indeed might be entitled to a refund. Nevertheless, the IRS still garnishes their wages, imposes tax liens, and levies their bank accounts, which often costs them their jobs, ruins their credit ratings, and forces them into the underground cash economy, according to the study.
To be sure, the IRS has in recent years also launched initiatives to clamp down on enforcement in areas such as reporting on holdings in foreign bank accounts such as UBS, which are more likely to affect upper-income taxpayers.
The TaxLifeboat findings validate what Nina Olson, the National Taxpayer Advocate, warned in her June 30, 2010, report to Congress: “The IRS’s policies fail to address the needs of low-income taxpayers, and that its lien-filing policies are harming and will continue to harm taxpayers’ financial viability without strong evidence that they promote future compliance with the tax laws or even bring in substantial revenue (in fact, the evidence points to the contrary).”
“Our study expands upon Ms. Olson’s concerns,” said TaxLifeboat CEO Tom Evans. “She criticized the IRS’s ‘one-off collection actions’ as well as ‘policies and automation that … drive a checklist mentality in its employees.’ This one-size-fits-all process can financially cripple individuals before the agency has correctly determined the size of their liability or whether they have indeed incurred one.”
Although the IRS is widely perceived as serving in an adversarial role, the agency in fact has a mandate to assist U.S. residents in being tax-compliant. Nevertheless, according to Olson’s report, between fiscal 2004 and projected fiscal 2011 inflation-adjusted spending for IRS enforcement has increased 17.9 percent, while spending for taxpayer services has declined by 6.8 percent.
The increased enforcement isn’t having a proportionate impact on revenue. IRS statistics show that revenue generated per tax lien, levy or seizure has declined 31 percent in the past five years; the balance of uncollected taxes, penalties and interest has jumped 104 percent; and adjusted for inflation, IRS collections from delinquent taxpayers are down 7 percent.
“Putting additional money into IRS enforcement is clearly unjustified given the undesirable social consequences and the diminishing returns on such expenditures,” Evans added.
The TaxLifeboat study shows that the highest concentration of IRS enforcement disproportionately falls in geographic areas with large minority populations. Many of these individuals earn the minimum wage and lack the education or resources to prepare a tax return or, especially, defend against government tax collectors. Some barely live on the money they earn and erroneously believe they don’t have to file a tax return.
Thus, when the IRS’s automated system fails to match the worker’s earnings reported from their employer with a filed tax return, an inquiry process is triggered that ultimately leads to enforcement actions. This process occurs even if taxes are withheld, they don’t owe anything, and may be due a refund. Since it typically takes the IRS a few years to catch up with delinquent filers, low-income workers usually doesn’t have the economic wherewithal to pay the back taxes (if any) plus penalties and interest, which doubles the total amount owed in less than five years.
TaxLifeboat’s study is based on an analysis of the top 1,000 zip codes with the highest number of IRS tax liens from July 2009 to July 2010 as reported by InfoUSA. The latest U.S. Census data (2000) was used to determine the racial profile of those high-IRS enforcement geographies.
Although African-Americans comprised 12.3 percent of the U.S. population in 2000, they represent 22.0 percent of the total population of the top 1,000 zip codes with IRS liens. Similarly, while Hispanics accounted for 12.5 percent of the total population in 2000, they accounted for 24.4 percent of the population in the zip codes with the highest number of IRS tax liens.
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