The day – Richest 1% dodge taxes on more than a fifth of their income, study finds
Richest Americans hide more than 20% of their income from the Internal Revenue Service, according to a comprehensive new tax evasion estimate, with the richest 1% accounting for more than a third of all unpaid federal taxes.
It costs the federal government about $ 175 billion in revenue a year, according to the findings of a team of economists from academia and the IRS.
The data comes as Senate Democrats plan to raise taxes for the ultra-rich to reduce inequality and fund their legislative priorities. President Joe Biden, in a marked turnaround from his predecessor, has indicated he wants to raise taxes on the wealthy, corporations and estates.
Researchers say years of cuts to IRS funding, combined with the increased sophistication of tax evasion tactics available to the wealthy, have made it easier than ever to evade tax obligations. And they say those estimates likely underestimate the true extent of tax evasion at the top of the income spectrum.
To detect tax evasion and measure evasion, the IRS checks returns at random. But such reviews reveal very little evidence of evasion among the extremely wealthy, in part because the wealthy use sophisticated accounting techniques that are difficult to trace, like offshore tax shelters, middleman firms, and complex conservation easements.
The IRS attempts to correct this through a number of statistical methods. But the new study finds that even standard IRS corrections underestimate the true extent of tax evasion among the wealthy.
Researchers were able to demonstrate this after the IRS and the Department of Justice launched a crackdown on tax evasion in 2008. This effort led to the creation of the Offshore Voluntary Disclosure Program, which allowed taxpayers to disclose previously hidden offshore assets and pay a penalty in exchange. for immunity from prosecution. According to the IRS, tens of thousands of taxpayers took advantage of the program before it closed in 2018.
As it turned out, hundreds of these taxpayers were also randomly audited before the program was created. Researchers matched these audits with subsequent disclosures and found that IRS auditors missed offshore assets about 93% of the time.
These wealth sheltered overseas were moreover concentrated almost exclusively among the highest incomes.
The study also found evidence of widespread under-reporting of income among mid-level business owners, whose income is taxed on the income of their owners. “Up to 35% of income earned at the top is not comprehensively examined in random audits,” the authors found.
Taking into account only the underreporting of offshore tax shelters and intermediary businesses, the authors produced an estimate of the true distribution of tax evasion in the United States. However, among the top fifth of taxpayers, avoidance is around 10%.
But the escape peaks among the richest 5%, who have incomes of at least $ 200,000 and who, as a cohort, capture more than a third of total national income. Taxpayers in this group hide more than 20% of their income from tax collectors.
In total, almost one in every 12 dollars earned in the United States is immune from federal income tax due to sophisticated evasion techniques of people earning more than $ 200,000 per year.
“The IRS needs a lot more resources from Congress,” Daniel Reck, lead author of the study, said via email. He said the agency should “invest in more comprehensive review strategies, involving audits of individuals, intermediary companies and other private entities (charities, trusts, etc.) reviews.”
“They can absolutely do all of this, but budget cuts have dramatically reduced their ability to do it,” he added.
Since 2010, total IRS funding has fallen by about 20%, according to recent testimony to Congress from IRS Commissioner Charles Rettig. The number of enforcement agents employed by the agency decreased by 30% over the same period.
These staff reductions have, in turn, led to a sharp drop in audit rates, especially for wealthy taxpayers. In the mid-2010s, nearly 30% of the returns of the richest 0.01% of taxpayers – those who earn at least $ 10 million a year – were typically audited. By 2019, that number had fallen to less than 10%.
Steven Rosenthal, a tax policy expert at the Urban Institute who was not involved in the research, warned that data on pre-offshore crackdown-era tax returns could be limited in terms of what they can tell us about the breakout today.
“Since the 2000s, the IRS has effectively shut down offshore accounts through aggressive enforcement, reporting, etc.,” he said via email. “And I don’t see why we would expect taxpayers who used offshore accounts in the 2000s to migrate to other illegal activities.”
But, Reck retorted, “it would be a big mistake to claim that offshore breakout is virtually non-existent in 2021”. To prove his case, he points to reports from whistleblowers claiming that the big banks continued to help high net worth clients hide money overseas after the crackdown, a 2018 Treasury Department report criticizing the IRS for. failing to pursue the offshore breakout aggressively enough, and the 2020 federal indictment against a billionaire software executive. Robert Brockman on tax evasion charges involving offshore assets.
“People might have a harder time just hiding wealth in Switzerland now, but they can still create complex networks of offshore and US entities and take ridiculously aggressive tax positions, like Brockman did,” Reck said. .
Rosenthal also noted that the distinction between legal tax evasion and illegal tax evasion becomes extremely blurry at the top of the income spectrum, where billionaires like Donald Trump employ teams of lawyers and accountants to push the boundaries. of what the tax code allows – in Trump’s case, allowing him to pay just $ 750 in 2017 out of millions of dollars in income.
“Reducing your tax bill from a lot of complicated structures is not clearly illegal,” he said. “The IRS could win or lose in court,” or they could just opt for a settlement somewhere in the middle.
“Hiring more agents would help,” he added. But, “the solution to this top avoidance is to write better tax rules.”