WASHINGTON – The top of high-income Americans evade significantly more in income taxes than Internal Revenue Service methods had previously assumed, according to upcoming estimates from IRS researchers and academic economists.
Overall, the document estimates that the top 1% of households do not report approximately 21% of their income, with 6 percentage points of that due to sophisticated strategies that random audits do not detect. For the top 0.1%, undeclared income can be nearly double what conventional IRS methodologies would suggest, the researchers wrote.
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These strategies include tax avoidance abroad, which may have declined after more stringent reporting requirements went into effect about a decade ago. But many high-income Americans also use associations and similar entities to avoid taxes, and such behavior may be increasing and making it more difficult for tax authorities to find and disentangle, said Daniel Reck of the London School of Economics, non-governmental lead author of the Article.
These transfer companies, where income goes directly to their owners’ individual tax returns and is not taxed at the corporate level, are a large and increasingly important part of the wealth of the top 1%, particularly the 0.1%. % higher. Investment funds, real estate companies, and closed family businesses in all industries are often structured as partnerships.
“There is more income than you could have thought at the top,” Reck said. “What is needed is a broader strategy that involves greater scrutiny of transfer companies [and] investments in the comprehensive audits the IRS conducts on its global high-wealth program. “
Internal Revenue Service (IRS) Commissioner Charles Rettig made a brief reference to the investigation, scheduled for release Monday as a working paper for the National Office of Economic Investigation, in testimony before Congress last week when he urged lawmakers to give the agency more money to enforce the law.
“This is not just a body count of how many people we have in law enforcement,” Rettig said, noting that every additional dollar spent on tax enforcement could generate between $ 5 and $ 7 in revenue. “We need to have specialized agents.”
“It’s not just a body count of how many people we have in law enforcement. We need to have specialized agents ”.
Investigating tax avoidance can be difficult and imprecise because it requires seeing what has been intentionally concealed. The document emphasizes that more work is needed to measure tax compliance by high-income Americans. The authors include John Guyton and Patrick Langetieg of the IRS, Max Risch of Carnegie Mellon University and Gabriel Zucman, an economist at the University of California at Berkeley who has advocated for an annual estate tax.
IRS audit fees and law enforcement personnel have declined steadily for a decade amid budget cuts, some government-wide cuts, and some focused on the IRS after the agency said it had given a some conservative groups inadequate scrutiny. President Biden and other Democrats have proposed reversing that trend with a significant expansion of the US tax agency.
The more ambitious proposals include estimates that a beefed-up IRS, armed with more people and stricter rules requiring more financial reporting from businesses, could raise an additional $ 1 trillion over a decade without raising taxes. Some Republicans have shown recent openness to expanding the IRS budget, but Democrats have yet to try to advance far-reaching proposals.
Using internal data from IRS tax returns, researchers looked at people who disclosed foreign accounts about a decade ago when the IRS encouraged people to come forward in exchange for more lenient treatment. They found that hundreds of them had been screened years before their disclosures for the random audits the IRS uses to measure tax evasion, and that IRS auditors found the foreign accounts only 7% of the time.
For transfer companies and complex partnerships, the researchers assumed default rates between those of large corporations and sole proprietorships, both areas where the IRS has better data than in the random audits it uses for investigative purposes on the companies. transfers. That led to higher evasion projections than previous IRS methods.
The research is an important contribution to understanding tax avoidance and should reinforce calls for more resources to the IRS, said Jason DeBacker, a professor at the University of South Carolina who has written separately on the topic.
However, he said some of the results depend on assumptions about transfer deals that are reasonable but less concrete than how other evasions are measured.
“They don’t have such a clean approach to identifying what [IRS] it loses from transferred income as they do from offshore income, ”DeBacker said in an email.
Write to Richard Rubin at [email protected]
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It appeared in the March 22, 2021 print edition as ‘New Document Estimates Broad Tax Avoidance in Top 1%’.