The evasion of high-income taxes much higher than previously thought, new paper estimates

These strategies include offshore tax evasion, which may have declined after stricter reporting requirements went into effect about a decade ago. But many high-income Americans also use partnerships and similar entities to avoid taxes, and this behavior may be increasing and becoming more difficult for tax authorities to find and unravel, said Daniel Reck of the London School of Economics, the lead non-governmental author of the newspaper.

These onlending businesses – where income passes directly to their owners’ individual tax returns and are not taxed at the corporate level – are a large and increasingly important part of the wealth of the top 1%, particularly the 0.1 % of the top. Investment funds, real estate businesses and privately held family businesses in all sectors are often structured as partnerships.

“There is more revenue than you could imagine at the top,” said Reck. “What is needed is a broader strategy that involves greater scrutiny by transit companies [and] investments in the comprehensive audits that the IRS makes in its global high-equity program. ”

IRS Commissioner Charles Rettig made a brief reference to the survey – due to be released on Monday as a working document from the National Bureau of Economic Research – in testimony to Congress last week, while urging lawmakers to give more money inspection agency.

“It’s not just a total count of how many people we have in compliance with the law,” said Rettig, arguing that each additional dollar spent on enforcement can yield $ 5 to $ 7 in revenue. “We need specialized agents.”

Research on tax evasion can be difficult and inaccurate because it requires seeing what was intentionally hidden. 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 advocates an annual fortune tax.

Audit fees from the IRS and the oversight team have continually dropped for a decade amid budget cuts, some from government-wide cuts and some focused on the IRS after the agency said it gave some conservative groups inappropriate scrutiny. President Biden and other Democrats have proposed to reverse this trend with a significant expansion of the US tax agency.

The most ambitious proposals include estimates that a reinforced IRS, armed with more people and stricter rules that require more financial reporting by companies, could raise an additional $ 1 trillion in a decade without raising taxes. Some Republicans have recently shown an openness to expand the IRS budget, but Democrats still need to try to advance far-reaching proposals.

Using internal IRS tax return data, the researchers looked at people who released accounts abroad about a decade ago, when the IRS was encouraging people to come forward in exchange for milder treatment. They found that hundreds of them were chosen years before their disclosures for the random audits that the IRS uses to measure tax evasion – and that IRS auditors found offshore accounts only 7% of the time.

For onlending businesses and complex partnerships, the researchers assumed non-compliance rates between those of large corporations and individual companies, both areas in which the IRS has better data than in random audits it uses for onlending research purposes. This led to higher evasion projections than previous IRS methods.

The research is an important contribution to understanding tax avoidance and should support calls to provide more resources to the IRS, said Jason DeBacker, a professor at the University of South Carolina who has written separately on the subject.

However, he said that part of the result depends on assumptions about onlending businesses that are reasonable, but less concrete than how other avoidances are measured.

“They don’t have such a clear approach to identifying what [IRS] loss of pass-through revenue as with offshore revenue, ”said DeBacker by email.

Write to Richard Rubin at [email protected]