The IRS should do more to nab wealthy tax dodgers

President Joe Biden has big, ambitious plans that will continue to ring up unwieldy bills for the federal government. His administration will have to fund a significant — but still undetermined — portion of those bills by raising taxes on affluent Americans. And that won’t go well unless Biden’s team can get ahead of well-heeled taxpayers who are inclined to outfox the system.
As Bloomberg News reported, the Internal Revenue Service has spent years underestimating how much income those artful dodgers have masked to avoid paying taxes. The money has been stashed in complex structures, often offshore bank accounts or private business partnerships, shortchanging Uncle Sam by about $175 billion a year.
The data revealing this come from a National Bureau of Economic Research study that looked at audits of individual income tax returns from 2006 to 2013. The researchers zeroed in on the top 1%, top .1% and top .01% of US taxpayers. In 2013, you qualified as a one-percenter if your adjusted gross income was $428,713 or more. You were in the .1% if you reported income of about $1.9 million or more, and the .01% if you reported $9.5 million or more.
The feds lean heavily on individual taxpayers to fill their coffers. In fiscal year 2019, the IRS collected about $1.9 trillion from more than 154 million income tax returns — which was about 54% of the $3.5 trillion it collected before it paid refunds that year. So even if the IRS now raises its game and taxes the money that affluent Americans shelter, it may increase the government’s overall haul just 10%. More meaningful increases will come only with a significant hike in tax rates.
Nevertheless, $175 billion is found money, and the IRS can do a better job of policing wealthy taxpayers’ shell games. The researchers discovered that most offshore tax evasion goes undetected and that an under-resourced IRS is easily outmaneuvered. The study acknowledges that many wealthy taxpayers operate in “the gray area between avoidance and evasion” — meaning that identifying any transgressions and then collecting what’s owed can be a thorny affair.
Buried inside the NBER data are revelations about human nature. Individual taxpayers’ propensity to embrace greed, possible fraud and risk is boiled down to mathematical equations that measure how likely they are to take a “binary concealment action.” The analysts found that affluent people were more likely to evade taxes if they could find ways to shelter a lot of money inexpensively. If they couldn’t save a lot of money, they’d pass. If it was expensive to shelter money, they’d pass.
But not many are passing, apparently. The top 1% under-report 20% to 25% of their annual income. The top .1% and .01% under-report about 15% of what they make. All of this is happening during a modern gilded age in which the top 1% control the lion’s share of America’s individual wealth.

—Bloomberg