More than a third of unpaid federal income taxes come from the top 1% of earners, and if the IRS could find a way to collect those taxes, federal revenues would increase by about $175 billion annually, according to a new study.
In fact, the 36% of unpaid taxes estimated from this top bracket is probably an understatement, given that random audits at that level are less likely, the study by researchers at the IRS and three universities asserts. Their working paper, yet to be peer-reviewed, was published by the National Bureau of Economic Research (NBER) this week.
With the federal government pumping out money for pandemic relief, income tax revenues become increasingly important to pay for the spending. Tax evasion is important because about half of federal revenues in the U.S. come from individuals. The deficit last year was estimated to be $3.3 trillion with a $2.3 trillion shortfall expected this year.
Collecting taxes can be tough. Not only does the IRS not have the resources to effectively chase taxpayers with complicated returns, but common evasion methods for top earners are less likely to be caught by the random audits they do have, according to the study. Those methods include using offshore accounts to house funds and claiming business income through partnerships and certain types of corporations.
Between 2010 and 2018, the IRS’ tax compliance activities declined 40% as its resources decreased by about 20%, the Congressional Budget Office (CBO) said in a study in July. Because of the drop in funding, the IRS cut 30% of employees in enforcement roles, with the number of highly specialized enforcement employees who handle the most complex examinations and collections cases sliding by 48%, the CBO said.
But even with the budget cuts, IRS Commissioner Charles Rettig testified last week to the House Ways and Means Committee that the IRS has remained committed to enforcing tax laws and has, over the last couple of years, shifted some of its resources to tax examinations and technology to focus on high-income and high-wealth taxpayers.
“Our advanced data and analytic strategies allow us to catch instances of tax evasion that would not have been possible just a few years ago,” Rettig testified. “We also recognize that we must evolve our enforcement efforts to address new types of tax fraud and criminal behavior. For example, the IRS has been working to ensure taxpayers with virtual currency transactions understand the tax laws governing virtual currency and meet their tax obligations.”
Still, if real headway is to be made in collecting more taxes, the CBO acknowledges it takes money to make money. It estimates if Congress allocates $20 billion over 10 years to the IRS for examinations and collections, federal revenues would increase by $61 billion, resulting in a $41 billion decrease in the cumulative deficit. If the funding is raised by $40 billion over the same period of time, it would boost revenues by $103 billion, decreasing the deficit by $63 billion.