The richest Americans use crafty methods to dodge taxes on far more income than the feds previously thought, a new study shows.
The Internal Revenue Service tries to catch high-income tax evaders with random audits — but they often fail to spot complex schemes that the wealthy employ to hide income, such as offshore bank accounts and pass-through businesses, according to the paper published Monday.
In all, the nation’s richest 1 percent fail to report 21 percent of their actual income — and 6 percentage points of that stems from “sophisticated evasion” strategies that federal audits miss, IRS and academic researchers estimate.
The bottom 50 percent of American taxpayers, by contrast, only fail to report about 7 percent of their income, says the study released by the National Bureau of Economic Research.
The researchers argue this undetected tax-dodging exacerbates income inequality by increasing the share of the nation’s total income that’s hoarded by a small number of elites.
It’s also costing the feds a pretty penny — the top 1 percent is responsible for more than a third of all unpaid federal income tax, and collecting what that group owes would increase federal revenues by about $175 billion a year, according to the paper.
“From a government revenue perspective, the top of the income distribution is the sub-population where understanding the extent of tax evasion is the most important, due to the high and increasing concentration of income in the United States,” reads the study, authored by researchers from the IRS, the London School of Economics, Carnegie Mellon University and the University of California, Berkeley.
But the researchers note that the difficulty of untangling rich taxpayers’ finances or taking them to court can make it harder for officials to go after these kinds of tax evaders.
The IRS’ enforcement staff and audit rates have steadily declined over the last decade as its funding shrank by about 20 percent since the 2010 fiscal year, commissioner Chuck Rettig recently told congressional lawmakers.
While the agency has shifted resources toward scrutinizing rich people’s returns, Rettig has reportedly called for more funding, saying every extra dollar spent on enforcement could generate $5 to $7 in revenue.
“It is not just a body count of how many people we have in enforcement,” Rettig said at a congressional hearing last week, according to The Wall Street Journal. “We need to have specialized agents.”