The top 1% of Americans may evade annual taxes of up to $163 billion, increasing the tax gap to $600 billion annually.
This is according to a report from the U.S. Department of the Treasury, titled “The Case for a Robust Attack on the Tax Gap”
According to the report, this estimate increases the tax gap to $600 billion every year. It also stated that tax evasion is concentrated among the wealthy in part because high-income taxpayers are able to employ experts who can better shield them from reporting their true incomes
The Treasury doesn’t specify income levels in their analysis of the top 1% but claims that the lost revenue is equal to all taxes paid by the bottom 90% of taxpayers.
IRS’ challenge in the collection of taxes
The report highlighted the IRS’ inability to efficiently collect 15% taxes owed due to lack of resources.
It stated, “Currently, an under-staffed IRS, with outdated technology, is unable to collect 15 percent of taxes that are owed, and a lack of resources means that audit rates have fallen across the board, but they’ve decreased more in the last decade for high earners than for Earned Income Tax Credit (EITC) recipients.
“For the IRS to appropriately enforce the tax laws against high earners and large corporations, it needs funding to hire and train revenue agents who can decipher their thousands of pages of sophisticated tax filings. It also needs access to information about opaque income streams—like proprietorship and partnership income—that accrue disproportionately to high-earners.”
In August, IRS Commissioner, Charles Rettig wrote in a letter responding to questions from Senators Elizabeth Warren, Bernie Sanders and Sheldon Whitehouse, said, “The inherent risk of the current reduced IRS audit coverage levels is that taxpayers may become emboldened to take riskier tax positions, such as overclaiming deductions, underreporting income, and not paying what they owe.”
According to the letter, the IRS has already begun moving resources to focus on people with complicated difficulties, such as high-income taxpayers, pass-through firms, international filers, and others.
“Increased funding will allow the IRS to hire additional specialized examination personnel to raise audit coverage in these areas,” Rettig wrote.
What you should know
The report comes as Congress considers a number of budget recommendations, including President Joe Biden’s call for an increase in IRS funding of $80 billion over the next decade to combat tax evasion by the wealthy.
According to the Center on Budget and Policy Priorities IRS funding has reduced by 19% since 2010, losing more than 33,378 full-time employees from 2010 to 2020.
Tax gap is the difference between what is owing and what is collected.