High-income tax avoidance, much greater than expected, new newspaper estimates

These strategies include tax cuts abroad, which may have slowed down after stricter reporting requirements came into effect about a decade ago. But many high-income Americans also use partnerships and similar institutions to avoid taxes, and such behavior can increase and become more difficult for tax authorities to find and untangle, said Daniel Reck of the London School of Economics, the lead author. of the newspaper, said.

Such pass-through businesses – where the income is transferred directly to the owners’ individual tax returns and not taxed at the corporate level – are a large and important part of the wealth of the best 1%, especially the best 0.1%. Investment funds, real estate companies and family-owned businesses in different industries are often structured as partnerships.

“There is more income than you might think at the top,” he said. Reck said. ‘What is needed is a broader strategy that involves a greater investigation into transit businesses [and] investments in the comprehensive audits that the IRS is conducting in its Global High Wealth Program. ”

Charles Rettig, commissioner of the IRS, briefly referred last week to the research – which was released Monday as a worksheet by the National Bureau of Economic Research – in congressional testimony, while urging lawmakers to ask the agency more to give money for its maintenance.

“It’s not just a count of the number of people we have in enforcement,” he said. Rightly said and claimed that every extra dollar spent on tax application could yield between $ 5 and $ 7 in revenue. “We need specialized agents.”

Research on tax avoidance can be difficult and inaccurate because it is necessary to see what was deliberately hidden. The article emphasizes that more work is needed to measure high-income Americans’ tax compliance. 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, Berkeley, who advocates an annual wealth tax.

The IRS’s audit rates and staffing have been steadily declining over the course of a decade amid budget cuts, some of the government cuts and some focused on the IRS after the agency said some conservative groups were conducting improper investigations. President Biden and other Democrats have suggested that the trend be reversed with a significant expansion of the U.S. tax agency.

The most ambitious proposals include estimates that a strengthened IRS, armed with more people and stricter rules that require more financial information by businesses, could collect an additional $ 1 trillion over a decade without raising taxes. Some Republicans have recently openly called for the expansion of the IRS budget, but Democrats have not yet tried to advance the far-reaching proposals.

Using IRS internal tax returns, the researchers looked at people who disclosed foreign accounts about a decade ago when the IRS encouraged people to come forward in exchange for softer treatment. They found that hundreds of them were selected years before their release for the random audits the IRS uses to measure tax avoidance – and that the IRS auditors found the foreign accounts only 7% of the time.

For the ongoing businesses and complex partnerships, the researchers accept the compliance rates between those of large corporations and sole proprietorships, both areas where the IRS has better data than in the random audits it uses for research purposes on passages. This has led to higher projections of avoidance than previous IRS methods.

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

However, he said some of the results depend on assumptions about transit businesses that are reasonable but less concrete than the way other avoidance is measured.

‘They do not have such an approach to identify what the [IRS] lack of transit income as for foreign income, ”DeBacker said in an email.

Write to Richard Rubin by [email protected]