‘Random audits, which do not detect most sophisticated evasion, underestimate top tax evasion,’ the authors of a new study said
Large pools of wealthy taxpayer money that should line federal government coffers are going undetected in tax audits, according to new research finding “substantial evasion at the top” of the income ladder.
The study adds to the recurring question of whether the rich are paying their fair share — but it suggests the extent of the problem could be bigger than the Internal Revenue Service’s own estimates. The study was circulated Monday by the National Bureau of Economic Research.
The study’s main source of information comes from the IRS’s own National Research Program. The program started in 2000 and attempts to measure how often taxpayers comply with tax rules. One way it accomplishes that is by auditing a random sample of tax returns.
The study’s main source of information comes from the IRS’s own National Research Program.
Comparing the random audits with the results of a Obama-era tax evasion crackdown that started in 2008, the researchers — who included IRS personnel — said the random audits “seldom detected concealed offshore wealth” such as undeclared foreign bank accounts.
Informed by those findings, the researchers then tried to measure the amount of undetected money that goes unreported.
When the researchers applied their own methods, the under-reported income for taxpayers at the bottom half of the income ladder rose 7%. For the top one-percent of earners, under-reported income rose 21%, said the authors, who also come from the London School of Economics and Carnegie Mellon.
Gabriel Zucman, an economist at the University of California, Berkeley, is one of the authors. He was one of the people advising Sen. Elizabeth Warren, a Democrat from Massachusetts, on her wealth tax idea during her bid for president.
“Random audits, which do not detect most sophisticated evasion, underestimate top tax evasion,” the researchers said. The study did acknowledge these types of audits are “not designed” to detect all the rich taxpayer money that goes under the radar.
How much does it miss?
The research is another chapter in the story of super-rich and taxes — and another chapter could be coming soon if President Joe Biden is able to enact tax hike for people making over $400,000.
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The research also shows the high stakes for the IRS’s declining audit rates.
In Fiscal Year 2019, the IRS audited more than 770,000 returns, down from approximately 1.7 million in Fiscal Year 2010. The IRS budget, adjusted for inflation, has dropped 20% in that time, according to Erin Collins, the National Taxpayer Advocate, a consumer watchdog inside the agency. Staffing levels have also dropped by the same percentage, she added.
Lawrence Summers, the Treasury Secretary from 1999 to 2001, and director of the White House National Economic Council during the Obama administration, has previously estimated the federal government could collect another $535 billion if it got back to 2011 audit rates and trained its focus on millionaires and billionaires.
Susan Long, co-director of Syracuse University’s TRAC Research Center and a professor of managerial statistics, told MarketWatch she was not surprised by the recent research.
As a result of a court order that’s been standing for decades, she constantly gets data on what the IRS is — and is not — doing when it comes to audits.
IRS audits on millionaires recouped $1.2 billion in 2020, down from $4.8 billion in 2012, the TRAC Research Center report said, adding that the agency “is letting billions of dollars in tax revenue slip through its fingers because budget and staffing cuts have left the agency incapable of fairly and effectively auditing the 637,212 millionaires now living in the United States.”
“The finger shouldn’t be pointed at the IRS,” Long told MarketWatch. “It’s not as if they haven’t been telling people there’s a problem.” It’s members of Congress who are at fault for increasingly bare budgets, she said.
The IRS did not respond to a request for comment, but IRS Commissioner Charles Rettig acknowledges audit rates for high-net worth taxpayers have slipped over time. That’s even as his staff have recently been eyeing more audits for the rich.
On Thursday, Rettig testified before members of the House Ways and Means’ Subcommittee on Oversight.
Rep. Steven Horsford, a Democrat from Nevada, pressed Rettig on audit rates for the rich and poor. He noted 2017 statistics that the IRS audited less than 600 tax returns for people making under $10 million, but it examined approximately 285,000 returns of people making under $25,000.
“Why do we have a two-tiered system of tax administration and enforcement in the IRS?” he asked.
“Sir, we absolutely do not,” Rettig responded, saying that the agency has been following laws requiring it to follow improper payments to low-income households on tax credits like the Earned Income Tax Credit.
Rettig said the IRS audits 8% of taxpayers making over $10 million. “For 2010, when we had the resources, we were auditing 23%,” he said.