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Tag: audit

  • How Michigan lost $1 million of liquor

    How Michigan lost $1 million of liquor

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    It’s been a rough couple of years for government-controlled liquor systems. In 2022, news broke of an inside job at the Virginia Alcoholic Beverage Control Authority (ABC), in which a former state employee tipped off private collectors about which state-run liquor stores were expecting deliveries of rare and sought-after bourbons. Last year, Oregon Liquor and Cannabis Commission officials were busted for siphoning off hard-to-obtain bourbons for their personal use.

    Now, Michigan is writing the latest chapter in the government’s century-long saga of alcohol control embarrassments. According to a just-released audit of the Michigan Liquor Control Commission (MLCC), the state’s complete inability to properly track its spirits inventory resulted in nearly a million dollars of liquor disappearing without a trace.

    Michigan is one of 17 states that still operates as a control state. MLCC is the sole wholesaler of distilled spirits, meaning all liquor sold and distributed in the state must be originally purchased by the agency. Michigan law requires MLCC to exercise “complete control over alcoholic beverage traffic,” but it turns out that the agency lacks control over pretty much everything.

    Since the 1990s, MLCC has outsourced the actual storage and warehousing of liquor to three “authorized distribution agents” (ADAs), who in turn use 11 warehouses to house the booze. The ADAs, which essentially act as a government-sanctioned oligopoly, are supposed to be operating as agents of the state. But the state code is silent about what the actual responsibilities of the ADAs entail, which results in a situation where everyone and no one is in charge at the same time.

    Perhaps the most significant finding of the audit is that $961,000 of MLCC’s liquor inventory—totaling 62,294 bottles, housed in ADA warehouses—mysteriously vanished between January and February 2022. To put this in context, the missing liquor constituted 20 percent of the state’s entire inventory. While the state is supposed to conduct physical inventory counts at the ADA warehouses, zero inventory checks took place from October 2019 to July 2022 (which, naturally, MLCC blamed on COVID-19, despite the pandemic not starting in earnest until the spring of 2020 and Michigan lifting its lockdown orders by June 2021).

    “MLCC was unable to provide documentation regarding the whereabouts of the missing inventory,” the audit dryly remarks. Although one should never ascribe to malice what can be explained by incompetence, it’s worth noting that the state’s inventory includes spirits ranging as high as $45,000 per bottle, which creates enormous opportunities for malfeasance given MLCC’s slipshod  tracking protocols.

    Were this Agatha Christie-meets-Ayn Rand mystery not enough, the audit goes on to spell out how MLCC is also wholly incapable of ordering rational amounts of each booze type it stocks. The report recounts the agency purchasing 12,204 bottles of a particular spirit in a week in which a mere 1,104 bottles of that spirit were sold. The agency then kept over 11,000 bottles of the spirit on hand for the next 48 weeks—the last 19 of which saw zero sales for it. MLCC also purchased 780 bottles of another spirit over the course of 77 weeks, with zero corresponding sales in any of the weeks those purchases were made.

    The MLCC’s problems extended beyond inventory ineptitude as well, with the agency also somehow issuing numerous liquor licenses to establishments located in dry jurisdictions, which it now will be forced to revoke. These establishments were selling alcohol in dry locales since 2018 without anyone noticing, until the auditor stepped in.

    In perhaps the understatement of the century—and in language only a government lawyer or accountant could appreciate—the audit rates MLCC’s overall performance as “not sufficient.” The agency’s preliminary response is that it “agrees” with all of the audit’s findings, as the report’s mountain of evidence is apparently too much even for a bureaucracy to ignore.

    Lost amid the report’s 65 pages of boozy bean-counting—and the scandal of a million dollars of liquor aspirating into thin air—lies a deeper question: Why, in 2024, is the Michigan government still trying to operate as the wholesaler for distilled spirits? It doesn’t do so for beer and wine, and it already goes so far as to outsource the actual warehousing and logistics to its distribution agents.

    Sadly, the most predictable answer is also likely the most accurate: MLCC has generated some $2 billion for the state’s general fund over the past decade. Perhaps a million dollars in missing liquor is a small price to pay after all.

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    C. Jarrett Dieterle

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  • Federal judge seeks audit of L.A. homelessness programs

    Federal judge seeks audit of L.A. homelessness programs

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    A federal judge wants an independent accounting of homelessness programs in Los Angeles — including Mayor Karen Bass’ signature Inside Safe initiative.

    U.S. District Court Judge David O. Carter made his remarks during oral arguments on a motion filed by lawyers for the L.A. Alliance for Human Rights, which has accused the city of failing to live up to the terms of a nearly 2-year-old settlement agreement to build shelter beds and clear homeless encampments. The settlement was reached eight months before Bass was sworn into office.

    The alliance said it wants the city to pay it $6.4 million in monetary sanctions.

    Carter, who has not yet issued a ruling or spelled out the parameters of such an audit, raised concerns about how public money to fight homelessness is being spent. He requested a more detailed accounting of the work performed by nonprofit homeless service providers — including those participating in Inside Safe, which has been moving unhoused Angelenos into hotels, motels and other facilities.

    “Which provider is producing results out there?” he asked. “We have no benchmark, and we have no accountability at this point. It’s just as simple as that.”

    Carter also asked whether City Controller Kenneth Mejia has the authority to audit homeless programs run by the mayor’s office. City Administrative Officer Matt Szabo, who advises the mayor and council, testified that the controller could not but said there are other ways the city can conduct audits.

    Mejia disputed that notion Friday, telling the judge on the second day of the hearing that his office can audit mayoral programs.

    “When it comes to a city program, especially those housed under elected officials, we have disagreements with the mayor and the city attorney’s office, but we believe there’s nothing in the charter that prohibits the mayor or the City Council from voluntarily submitting themselves to an audit, so we disagree.”

    Hours later, Mejia announced on X that he is launching a “focused audit” on Inside Safe, which received $250 million in this year’s city budget.

    Bass, who is in France with a delegation of city officials examining preparations for the Olympics, could not immediately respond to a request for comment.

    Michele Martinez, special master for Carter, said Bass and City Council President Paul Krekorian had spoken to the judge and offered an independent auditor chosen by the court and paid for by the city.

    Mejia said he intends to follow through with his audit.

    “Our office welcomes an external, independent auditor to aid in that ongoing litigation,” he said in a statement to The Times. “However, the issues at play in the federal litigation are specific and unique to that case. As the City’s Chief Auditor, it is my responsibility to bring transparency and accountability to specific components of Inside Safe.”

    The L.A. Alliance, a group of businesses and residents, alleges that the city repeatedly missed deadlines and negotiated in bad faith over terms of a settlement agreement to shelter at least 60% of people living on the streets in each council district.

    Elizabeth Mitchell, the group’s attorney, said the city promised last March that it would come into compliance and provide the alliance with plans to build beds and address homeless encampments in each district.

    “We were promised … that if we held off bringing this to the court for just six months, that they would have a full evaluation of each district. That, to my knowledge, has never been done,” Mitchell said. “Even the numbers that were finally agreed upon by the council members were not fully vetted.”

    Scott Marcus, chief assistant city attorney, said the city did not breach the agreement when it comes to bed creation but that it did fail to communicate with the alliance when it sought a citywide program to clean up encampments, as opposed to doing so district by district.

    “We could have done a better job keeping the alliance in the loop and communicating with them when our circumstances changed,” Marcus said.

    Carter said he would delay a ruling while city officials and lawyers for L.A. Alliance discuss details of the audit and Bass is abroad.

    However, the judge said he plans to rule that the city acted in bad faith.

    The demands for increased oversight of homeless services are not limited to Mejia and the judge. On Friday, the council voted to seek a separate performance evaluation of services being provided to the city by the Los Angeles Homeless Services Authority.

    Councilmember Bob Blumenfield, who drafted the proposal and sits on the homelessness committee, said the city provides tens of millions of dollars each year to that city-county agency.

    “We have all known that LAHSA can be opaque at times and, frankly, downright deceptive in terms of how they secure funding from this city,” he said.

    Va Lecia Adams Kellum, LAHSA’s chief executive officer, said she looks forward to the assessment.

    “I welcome the passage of the motion from Councilmembers Blumenfield and [Monica] Rodriguez,” she said, “and look forward to working with the city on developing a framework that provides greater insight into program performance.”

    Times staff writer David Zahniser contributed to this report.

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    Ruben Vives

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  • KPMG faces fresh questions over audits after New York Community turmoil

    KPMG faces fresh questions over audits after New York Community turmoil

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    The recent turmoil at New York Community Bancorp is raising more questions about its auditor KPMG, which last year faced scrutiny over its audits of three now-defunct regional banks.

    KPMG has built up a large business auditing U.S. banks and had long audited Long Island-based New York Community. The bank’s stock is down nearly 70% this year after a series of disclosures that have troubled investors. Last week, it replaced its CEO, filled leadership vacancies in its internal risk and audit departments and disclosed weaknesses in internal controls over its financial reports. 

    The latter disclosure seemingly conflicts with an audit KPMG performed in 2022, when KPMG said the bank’s internal controls were effective.

    The facts over KPMG’s audits aren’t public, making it hard to gauge whether auditors rightfully pushed back as New York Community quickly grew in 2023. But the bank’s disclosures of weaknesses are the latest headache for KPMG, which audited all three of the regional banks that failed last year: Silicon Valley Bank, Signature Bank and First Republic Bank. 

    “There’s no excuse for it,” said Francine McKenna, a former KPMG consultant whose The Dig newsletter focuses on accounting issues. 

    Debates over KPMG’s audits of those three banks — and now, the struggling New York Community — center around whether auditors are to blame for poor decision-making by the banks, or whether the blame lies solely on CEOs. A full answer on that question is not yet clear, but all four cases highlight the perils of rapid growth.

    When growing quickly, banks’ risk management and financial reporting effectiveness must “keep pace with their growth in assets,” said Kiridaran Kanagaretnam, a professor at York University in Canada who researches bank accounting.

    KPMG did not comment on the issues at New York Community. In a statement, KPMG spokesman Russ Grote said the firm has “long had a substantial and dynamic audit practice in the financial services industry.” 

    “We conduct our audits in accordance with professional standards, maintaining auditor independence. Due to client confidentiality, we have no specific comment,” the KPMG spokesman said.

    Spokespeople at New York Community did not respond to requests for comment.

    The three regional banks that failed last year were all darlings of bank investors who preferred high-growth banks. New York Community long took a more old-fashioned approach, having bulked up mostly through a series of smaller mergers in the 2000s. 

    Then came December 2022, when in an effort to diversify away from rent-controlled New York City apartment buildings, the bank bought Troy, Michigan-based Flagstar Bank. Fresh off that acquisition, regulators allowed New York Community to buy large chunks of Signature Bank once its crypto-friendly strategy led to its failure in March of last year.

    In a securities filing last week, New York Community said that it had “identified material weaknesses” in its internal controls for loan reviews, citing “ineffective oversight, risk assessment and monitoring activities.”

    The company also delayed the release of its annual report, saying it’s “been working diligently to finalize” it but must first complete its review of the issue. The company said it expects its annual report to state that its internal controls over financial reporting “were not effective” at the end of 2023 and lay out a “remediation plan” to fix those weaknesses.

    The bank’s issues highlight the need for the “strictest controls and auditing” for retail-focused banks since they handle everyday depositors’ money, said Atul Shah, a professor at City University of London. Shah wrote a book about auditors’ shortcomings before the 2008 financial crisis and has argued for a stronger government role in auditing.

    “Aggressive CEOs who wish to grow the numbers very fast will despise controls and favour risky assets,” Shah said in an email. “This has to be checked in time and regulated.”

    One potential explanation for New York Community’s problems in 2023 is the difficulty of integrating Flagstar Bank and the chunks of Signature Bank all within one system, said Jack Castonguay, an accounting professor at Hofstra University. 

    In 2022, New York Community’s loan portfolio was entirely its own, but last year the company absorbed two other sets of loan books that “may not be structured” the same. 

    “It’s kind of like if all your devices have lightning chargers, and then you have a USB-C phone,” Castonguay said.

    KPMG may also have found the same weaknesses as it looked at the bank’s books from last year, though that information is not public yet, Castonguay noted. 

    Last year, Castonguay wrote an op-ed arguing that while scrutiny of auditing processes is warranted, the failures of Silicon Valley, First Republic and Signature banks may have been solely due to “poor management” rather than anything within an auditors’ control.

    Others, such as McKenna, have been far more critical and argued the failures reflect auditors failing to take a hard look at all the assumptions that make up a bank’s financial statements. McKenna also criticized the “revolving door” between KPMG and bank leadership, noting the CEOs of both First Republic and Signature both held top roles at KPMG. 

    “It seems like we’ve got a little cottage industry in audit partners thinking they can run banks,” McKenna said. “And clearly, they’re not doing a very good job.”

    New York Community recently replaced CEO Tom Cangemi, who worked at KPMG for a few years after college but did not become a partner there — since he instead took on chief financial officer roles at banks.

    Cangemi, who was the architect of the bank’s recent growth, did not respond to a request for comment.

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    Polo Rocha

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  • LAPD slams ‘highly inaccurate’ audit that questioned millions spent on helicopters

    LAPD slams ‘highly inaccurate’ audit that questioned millions spent on helicopters

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    Two months after an audit raised questions about the cost and value of the Los Angeles Police Department’s helicopter program, the department has shot back, defending its nearly round-the-clock flights above the city.

    In a presentation to the L.A. Police Commission on Tuesday, LAPD Cmdr. Shannon Paulson said that the audit showed a “fundamental lack of understanding” about how the aircraft help identify and catch crime suspects.

    The audit by the city controller’s office reported that 61% of flight time by LAPD helicopters was spent on “non-high priority incidents.” Paulson said that finding was based on a “highly inaccurate definition” of so-called Part I crimes set by the FBI, which include homicides, robberies and property crimes such as auto theft.

    The audit ignored the fact that with a home burglary or overnight car theft, the department is “unlikely to provoke a response [from a helicopter] due to the fact that the crime is stale,” Paulson said. She noted that helicopters are often dispatched to disrupt street racing or sideshows, which are not considered Part I offenses.

    Paulson, who is second-in-command at the LAPD’s Counter-Terrorism and Special Operations Bureau, said the controller’s report also relied on “inflated” statistics related to fuel costs and burn rates, overstating the cost and environmental impact. LAPD officials also questioned the study’s methodology.

    The audit, released in December by L.A. City Controller Kenneth Mejia’s office, scrutinized the millions of dollars the department spends annually to maintain its aerial fleet, said to be the largest of any municipal department in the country.

    Sergio Perez, chief of accountability and oversight for the controller’s office, said Wednesday that the office stood by its findings. He told The Times that the LAPD failed to “provide meaningful feedback and refused to sit down for exit meetings” with the report’s authors, and also withheld certain data that it only published with its own report.

    Perez questioned the scientific rigor of an internal study by any organization “interested in defending its marquee programs.”

    “This seems to be an example of an agency that found itself very unhappy with the recommendations and conclusions of an independent, objective, outside audit and now it’s trying to turn the clock back and say that the information that we included was not accurate,” Perez said.

    Another contested portion of the audit dealt with the use of LAPD helicopters for non-law enforcement functions, such as air shows and flights to promote the LAPD or raise money for police-related causes. Such uses came under scrutiny by department officials in 2014 after a police chopper dropped scores of golf balls onto a golf course as part of a fundraiser. The department also recently reviewed whether its helicopters were creating confusion by flying too low over crime scenes.

    LAPD officials said the helicopters used in ceremonial roles were already in the air for other purposes and would have been diverted if a serious emergency had occurred.

    Beyond the audit, a group of UCLA researchers have spent months studying helicopters’ health impacts in Black and Latino neighborhoods by using highly sensitive instruments to measure noise pollution from low-altitude flights. Residents and some academics have said that the disruptive noise caused by helicopters circling overhead can cause serious health consequences, including poor sleep and anxiety. The controller’s office also released a heat-map tool that would allow users to look up the costs and pollution associated with helicopters flying over their neighborhoods.

    The LAPD released data showing that the amount of time helicopters spent in certain areas was proportionate with the amount of violent crime and gun violence there.

    Helicopters also allow law enforcement to more safely track suspects during high-speed pursuits, officials said, dramatically reducing the number of collisions from such chases. Some of the units are equipped with a thermal camera system that can pick up the heat signatures of suspects who are attempting to hide.

    In recent weeks, helicopters have been used to monitor protests of a visit by President Biden, to track members of a burglary ring and to locate a missing hiker, officials said Tuesday, while also noting an incident in which an airship used its powerful “Nightsun” spotlight to illuminate hilly terrain near Santa Monica. And yet, officials said, such context was left out the controller’s report.

    “The question is how do you put a price on saving a life,” Assistant Chief Blake Chow told the commission.

    The two reports did agree on the need for better data collection about helicopter flights.

    LAPD Chief Michel Moore said that the department’s helicopters have been used to safeguard his home after his family received threats, saying their “presence is a blanket of security.”

    He and other department officials found a sympathetic audience in the commission, who seemed to second-guess the city controller’s study.

    “How do we work with them to prevent something like this to happen in the future?” asked Commissioner Fabian Garcia.

    Commission President Erroll Southers said he found it “very concerning” that the controller had cited no study that found a conclusive link that the helicopters pose a “health risk to the public.”

    Much like other law enforcement technology, the LAPD’s reliance on helicopters has drawn greater interest since the 2020 police murder of George Floyd in Minneapolis and the social justice reckoning that followed. Mejia, the city controller, ran on the promise of closely scrutinizing police spending, which has often put him at odds with the powerful Los Angeles Police Protective League, the union that represents the city’s rank-and-file officers.

    Dinah Manning, Mejia’s director of public safety, said in an interview Wednesday that it seemed the LAPD was trying to discredit the audit’s findings by suggesting it was politically motivated.

    “The civil service staff, the auditors who worked on this audit are folks who were here before Kenneth Mejia, are folks who will be here after Kenneth Mejia,” she said.

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    Libor Jany

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  • 'Woefully inadequate': Why it's so hard to find a shelter bed in L.A.

    'Woefully inadequate': Why it's so hard to find a shelter bed in L.A.

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    Poor and unreliable data collection by the Los Angeles Homeless Services Authority makes it “nearly impossible” for unhoused people and the city to know how many interim beds are available and how many are being used at any given time, according to a new city audit.

    Despite having a software-based reservation system for shelter bed availability, LAHSA’s system is so unreliable that the agency monitors bed availability using phone calls and daily emails, the audit found.

    The homeless services agency also failed to follow up with interim housing providers on their point-in-time sheltered homeless count data, despite indications of data quality issues. Additionally, many shelters recently reported low bed use rates, which may suggest that the number of unhoused people in shelters is being undercounted and that available beds are not being used.

    The new audit also found that LAHSA’s Find-a-Shelter app had inaccurate data and did not attract large participation by providers, which limited its function.

    At a news conference Wednesday, Sergio Perez, chief of accountability and oversight with the city controller’s office, said the city and its homeless community need a system as reliable as ride-hailing apps that enable people to see available vehicles in real time and where they are.

    “That’s what we need to meet the ongoing crisis on our streets today, to meet the real human need of our unhoused neighbors,” Perez said. “It is what we lack.”

    Perez said the data system deficiencies raise concerns about L.A.’s attempts to address the homelessness crisis with urgency and calls into question the validity of the city’s efforts not to criminalize poverty.

    “If we can’t track interim shelter beds in a timely manner … then we run the risk, on a day-to-day basis, of violating the Constitution, which prohibits governments like the city of Los Angeles from punishing those who live on our streets when they have no other option. It could be that this is happening in Los Angeles as we speak,” he said.

    City Controller Kenneth Mejia said that LAHSA’s dysfunctional system “is not only insufficient for addressing the wide problem of L.A.’s homelessness emergency, but in fact it proved to be fully deficient last winter, when we had severe winter weather.”

    According to the report, the homelessness agency contracted with 211 L.A. last winter to respond to requests through the winter shelter hotline and provide referrals to shelters. When 211 staff realized that LAHSA’s bed reservation system was inaccurate, telephone operators were forced to call shelters to verify bed occupancy before making referrals. The process increased wait times for callers and for 211 L.A. to respond to them.

    Call-line staff told auditors that they received more than 160,000 shelter-related calls from people for the winter shelter program, but were only able to answer just over 50%.

    In a statement released with the report, Mejia said it is crucial that the city maximize use of its “extremely limited amount of interim housing beds” and that providers know when beds are available.

    In the audit, Mejia touted Mayor Karen Bass’ move last year to declare the homelessness crisis a state of emergency, but pointed to the inadequacy of some resources available to properly address it: Only 16,100 interim housing beds are available for the estimated 46,260 people in the city experiencing sheltered or unsheltered homelessness, according to LAHSA’s 2023 homeless count.

    “[T]he woefully inadequate amount of both interim and permanent housing resources, as well as the antiquated and inefficient methods of data collection and housing referral processes, significantly inhibit efforts by the city to respond to the crisis with the urgency that it requires,” he said.

    In a statement to The Times, LAHSA said the audit comes as the agency is working to enhance its data practices and improve the accuracy of its bed availability information.

    The new bed-availability system in the works will include detailed tracking of beds, units, sites and buildings; current occupancy rates; real-time unit and bed availability; and information for service providers about all the programs in a building, among other things. The system will be fully implemented by Dec. 31, 2024.

    LAHSA added that it is developing a new client portal that will improve communication tools. People seeking services will be able to see a list of all shelters and access centers; view upcoming appointments; direct-message case managers and get alerts to help them find shelter during emergencies or severe weather events.

    “Data collection and dissemination are at the core of LAHSA’s purpose, and we are making significant improvements so we can offer the information that maximizes our interim housing system and move into permanent housing faster,” the agency said.

    The city controller’s office recommended that LAHSA, in collaboration with the city, redesign a shelter bed availability system that makes it easier to facilitate referrals to its shelters. It also suggested that it craft and execute a plan to “monitor, evaluate, and enforce” requirements for shelter program operators to report bed attendance and availability data completely, accurately and in a timely manner.

    Lastly, the office advised the agency to require operators participating in the annual homeless count that report bed use rates lower than 65% or more than 105% to accurately count the number of unhoused people in their shelter and explain bed use rates.

    Along with the audit, the city controller’s office also launched an interim housing bed availability map. Officials said they hope it serves as an example for LAHSA if it follows their recommendations.

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    Dorany Pineda

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  • Most Americans aren’t happy with how much income tax they paid this year

    Most Americans aren’t happy with how much income tax they paid this year

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    Americans’ discontent with the size of their federal income-tax bill is at a two-decade high, according to a new poll — even though Congress hasn’t passed any direct income-tax increases in recent years.

    One month after the 2023 tax season’s conclusion, 51% of respondents in a newly released Gallup poll said their income taxes were not fair. That’s up from 44% last year and marks a record high since 1997, when Gallup’s pollsters started asking how people felt about their income-tax bills.

    Meanwhile, 46% of people said they were paying a fair amount of income tax. That basically matched the dim mood over two decades ago, in in 1999, when 45% said that they were paying a fair amount.

    Six in 10 poll participants said their federal income taxes were “too high,” pollsters said. 2001 was the last time that share of people felt the same way, Gallup said.

    Feeling the squeeze: Grocery prices are rising more slowly, but food insecurity is surging among low-income Americans

    Gallup pollsters spoke with more than 1,000 people, doing their field work through most of April.

    The poll comes during a fierce debate about whether the wealthiest taxpayers, as well as corporations, are paying enough in taxes. The Biden administration has been pressing for higher tax rates on high earners. A Democratic-controlled Congress last year passed a law with an $80 billion funding infusion for the IRS over a 10-year span in part to launch more audits of rich individuals and corporations.

    Many Americans walked away from tax season with income-tax refunds that were smaller than a year ago. That’s due, at least in part, to the end of pandemic-era boosts to certain credits, tax experts have previously told MarketWatch.

    Both backdrops might be at play in the public mood on taxes, observers noted, and political affiliation could have something to do with these changes, Gallup said. Only one-third of Republicans said their income taxes this year were fair, for example — that’s down from 63% in 2020, the last full year of the Trump administration.

    The change in Republican sentiment could be why there was a heavy swing since 2020, when 59% said their taxes represented a fair number. In 2020, 56% of political independents said their taxes were fair, and that percentage fell to 45% a few years later. Among Democrats, meanwhile, the 63% saying their taxes were fair was virtually unchanged over that span.

    Republicans “are certainly more frustrated now with Biden in office,” said Jeff Jones, senior editor of the Gallup poll. “But they are even more frustrated than they were when Obama was in office.”

    Democrat Joe Biden campaigned in 2020 on pledges to raise taxes on corporations and households earning over $400,000 a year and not on those making less than that. So far, the president has not been able to turn proposals like a billionaire’s minimum tax or a higher top tax rate into law.

    The real tax-policy fight brewing in the background is the 2025 expiration of Trump-era tax cuts, experts have said.

    In the sweeping 2017 tax-code overhaul, Congress reduced five of seven income-tax brackets and boosted commonly used features of the tax code, including payouts for the child tax credit and the standard deduction. But some of those tax cuts were scheduled to sunset, while others were permanent.

    Another potential shaping the mood on taxes is the broader economy and recent tax season, Jones said. One possibility, he noted, is that some people are getting pushed to higher tax brackets with pay raises meant to keep up with inflation. (Tax brackets are adjusted annually to account for inflation.)

    While inflation is still pinching wallets, tax refunds are lower than they were a year ago.

    Refunds averaged just over $2,800, and that’s down more than 7% from a year earlier, according to IRS data through May 12.

    So you know: What happens if you can’t pay your taxes? IRS has a payment plan — but read this before you sign up.

    For his part, Lawrence Zelenak, who teaches tax law at Duke University, thinks the current darkening public mood “is largely a response to the disappearance of all the temporary pandemic-related tax relief,” he said.

    In 2020 an estimated 60% of households ended up with no federal income-tax liability because they were making less and bringing in more through direct cash assistance from the federal government, according to Tax Policy Center estimates.

    By 2022, an estimated 40% of households wouldn’t face any federal income tax, according to the nonpartisan think tank — which is more in line with levels seen before the pandemic.

    Keep in mind: IRS will launch free tax-filing pilot in 2024. TurboTax, H&R Block and Republicans are opposed.

    Refunds during 2022 got a kick from extragenerous payouts including the child tax credit, the child- and dependent-care credit and the earned-income tax credit.

    Most taxpayers also got a chance to shave their tax bill with a temporary change that let them take the standard deduction and also write off a portion of their charitable donations. But the credits reverted to their prepandemic size, and the deduction on cash donations subsequently went away.

    “With the end of the pandemic tax relief, many people have seen their income-tax liabilities go up, and it’s not surprising they see that as unfair,” Zelenak said. “So it may be the change more than the absolute level of tax.”

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  • Worried the IRS is going to audit your tax return? If you earn less than $400,000, you can probably relax.

    Worried the IRS is going to audit your tax return? If you earn less than $400,000, you can probably relax.

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    Some clarity is emerging regarding statements from Biden administration officials that no one making less than $400,000 will see higher audit rates by the Internal Revenue Service, which is about to step up its scrutiny of wealthy taxpayers.

    The Inflation Reduction Act — the tax and climate package enacted last summer — earmarked $80 billion for the IRS over the next decade and a half. The money is intended in part to facilitate more audits of corporations and wealthier individuals.

    Ahead of the bill’s passage, Treasury Secretary Janet Yellen pledged that there would be no increase in the audit rate for households and small businesses with annual incomes below $400,000 “relative to historical levels.”

    But Republican critics and other observers have asked what “historical levels” might actually mean.

    The audit rate on returns for tax year 2018 is the reference point to keep in mind, IRS Commissioner Danny Werfel told senators on Wednesday. He emphasized that “there’s no surge coming for workers, retirees and others.”

    The IRS audited fewer than 1% of 2018 returns with total positive incomes — the sum of all positive amounts shown for various sources of income reported on an individual income-tax return, which excludes losses — of between $1 and $500,000, according to statistics that the tax agency released last week.

    The agency has three years to start an audit from the time it receives a return.

    Also read: The IRS wants more people working in tax enforcement. Now it has to find them.

    The numbers show that 0.4% of returns for taxpayers earning up to $25,000 were audited. That figure was 0.3% for returns between $200,000 and $500,000 and more than 9% for returns over $10 million, the IRS data show. Six years earlier, more than 13% of returns over $10 million were scrutinized, according to the IRS.

    “Help us with understanding what the words ‘historic level’ means,” Sen. James Lankford, a Republican from Oklahoma, asked Werfel during a Wednesday budget hearing.

    “We will take the most recent final audit rate, and it’s historically low … and we allow that to be the marker for least several years, and then we’re revisit it,” Werfel said. The 2018 audit rates were the newest final rates, he added.

    “So the 2018 number is what it’s going to be?” Lankford asked.

    “Yes,” Werfel replied.

    “Werfel’s explanation that 2018 audit levels will be the reference point is the most detail I’ve heard so far,” Erica York, s senior economist at the Tax Foundation, told MarketWatch. “He did seem to leave open the possibility of revisiting the reference year for ‘historical’ in the future,” she added.

    Another open question has been how the $400,000 income threshold will be determined. Months after the Inflation Reduction Act passed, IRS and Treasury officials still hadn’t finalized what counted as $400,000 in income, according to a January Treasury Department watchdog report.

    “How are you arriving at this number?” asked Sen. Marsha Blackburn, a Republican from Tennessee. Blackburn’s state has many self-employed entrepreneurs who might appear richer on paper than they actually are, she said. “While they may have a higher gross, their net is very low,” she added.

    “We’re going to look at total positive income as our metric,” Werfel said. He later added that “there would be no increased likelihood of an audit if they have less than $400,000 in total positive income.”

    The IRS description of total positive income as “the sum of all positive amounts shown for the various sources of income reported on an individual income tax return and, thus, excludes losses” represents, effectively, a tally of income before taxpayers subtract their losses.

    Total positive income is a metric the IRS usually applies to categorize audits, the Tax Foundation’s York noted. But one challenge of strict thresholds for more audits, she said, “is that it creates incentives for underreporting income” to stay under the line.

    Compared with recent years, there are now more specifics about how the IRS will implement additional audits of higher-income taxpayers, said Janet Holtzblatt, a senior fellow at the Tax Policy Center.

    “But still there are questions,” she noted, about how the agency will treat situations when taxpayers don’t provide full picture of their income.

    Read on: Make sure the tax breaks you’re taking now won’t hammer you in retirement

    Also: ‘This was a test’: IRS has handled more than 100 million returns already — Tax Day by the numbers

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