January 28, 2022
What is a “lifestyle trigger” for the IRS?
Essentially a lifestyle is triggered when a person’s assets do not match their reported income. Through the lens of the IRS, the thinking goes something like this: If you own a mansion, a second or third vacation property, an expensive car, and a personal jet, it seems unlikely that your income would be that of the average American.
The IRS uses this trigger to identify potential fraud. Some may remember back in 1994 when the Washington Post reported on the new “economic reality” view IRS auditors were taking. While the practice has been geared down since 1997, it is not entirely out of use.
The pros and cons of using this lens on taxpayers
Proponents of the lifestyle trigger posit that it is a good way to identify fraud. Indeed, it is what landed Al Capone in Alcatraz in 1934.
Critics of the lifestyle trigger cite privacy concerns. Should the public be required to submit documentation of all of their purchases? Should taxpayers have to answer detailed questions about their spending habits, even when it can be intensely personal? Could this type of leeway lead to overzealous audits?
Wars provoked the tax code change
No one will remember when the Sixteenth Amendment was adopted in 1913, but the effect was to tax incomes, gifts, and estates. The idea, however, was not to tax one’s basic means of getting by. After all, the country was founded in part on the belief that a government should not be taxing things such as tea.
At the turn of the century income, that which someone earned by working was not looked to as the basis of big taxes. Income from the capital was another story. What changed this view was the cost of World War I and World War II. According to writer David Cay Johnston, during times of war lawmakers “got a taste of the huge revenues they could control by expanding the tax base.” After the war politicians worked to expand the tax base to include income; that which someone earned by working.
While history answers the how and the why, the question remains as to whether a lifestyle trigger is a valid tool or a blatant invasion of privacy. What do you think?