Synopsis of our research: The United States federal government currently under-funds tax fraud investigations. State governments, on average, lose money investigating SNAP fraud.
Summary of Findings
- There were nearly as many food stamp (SNAP) investigations as there were tax refunds examined.
- The IRS recovers an average of $55,470 per investigation vs. the SNAP program's $615
- After accounting for costs, states lose at least $.33 per dollar spent investigating, while the IRS makes about $14
Given these facts one might expect to see a crackdown on tax fraud and less emphasis on welfare fraud. In fact we've seen budgets that have left the IRS chronically under-funded.
The IRS Enforcement Money-Making Machine
The most recent IRS tax book from 2017 shows the following facts:
- Only .5% of all US returns were examined.
- The IRS collected over $54.4 billion in gross assessments (telling people they owe more money), and $26.5 billion in penalties for a total of 80.9 billion gross.
- Sometimes the IRS will find people who actually overpaid, to the tune of $14.4 billion in credits.
- Subtracting credits, IRS enforcement brought in $66.5 billion.
- The entire IRS spending was $11.5 billion.
- Enforcement is only about 40% of all IRS expenses. The majority goes to taxpayer services and operations support (which is mostly just collecting and processing all the regular returns).
- Therefore, IRS enforcement department made about $14.15 for every dollar spent. This does not account for increased compliance from people who are never audited. It's likely fewer people will cheat if the chance of getting caught is higher.
The IRS cannot use their recovered funds to fund themselves. But if the IRS were a corporation it would have fantastic profit margins. 2017 was also not a fluke. The graph below shows how many dollars IRS enforcement brought in (in net unpaid assessments and civil penalties) per dollar spent on enforcement.
The average since 2008 is $11.98. Enforcement seems to be doing more with less, likely due to improvements in automation. That said, the agency has consistently been passed over for technology improvements that could make the system even more efficient. The IRS, believe it or not, has some savvy accountants. They know the USA is losing money by under-funding enforcement, which is why they (especially through the IRS organization called the Taxpayer Advocate Service) consistently request more money to fund enforcement and technology updates to more efficiently find issues.
The IRS desperately needs to replace its antiquated technology systems. Indeed, this is the agency’s #1 need… given the additional revenue and improved taxpayer service state-of-the-art technology is likely to bring in, I believe spending for new systems going forward should be measured in billions—not millions.
The report advocates various funding increases that will pay for themselves, but the current administration has so far declined.
Welfare Enforcement Money Sinks
SNAP, usually still referred to as “food stamps” from the old program name, is a large program to provide food assistance to low income Americans. It's also the one most frequently criticized. A quick analysis of closed captions shows conservative channel Fox News being the station most likely to talk about both food stamps and welfare fraud. This has led states – especially conservative states – to conduct many investigations. What percent of spending is actually fraud, and how fruitful are the investigations into fraud?
The first thing worth noting is there are almost as many investigations into food stamp fraud than there are investigations into tax fraud despite a much smaller program (148 million returns vs. 44 million SNAP participants). In 2016 states conducted 963,965 investigations (table 46) compared with the IRS conducting 1,166,379 that same year. The IRS recovered $55,470 per investigation, while the program recovered about $615 per SNAP investigation, of which the states received about $215 (both records in 2016). Neither figure takes into account operational costs, but the IRS investigation is roughly 90 times more productive.
Further cost analysis shows that the average SNAP investigation costs about $320 split between the state and the federal governments. In the end states end up with a best-case return of $0.67 per dollar spent on fraud investigations.
Note that SNAP does not include as many cost types in its cost reporting for fraud investigation, and it's quite likely the cost is even higher if we were to compare apples to apples.
Of course no one likes someone who doesn't actually need assistance leeching off public assistance. And doubtless there are common-sense low-cost means of cutting down on welfare fraud. But it also seems obvious expending resources in traditional investigation and manual review is extremely inefficient. In order for government to run efficiently it must account for the cost as well as the benefit.