Recent research suggests that those who have the most money tend to pay the least amount of their earnings to the Internal Revenue Service (IRS).
The research, from the National Bureau of Economic Research, focused on the incidence of tax evasion in the U.S.
In an effort to quantify how much high-wealth taxpayers evade their tax obligation, study authors looked at data from the IRS from sources including operational audits, enforcement campaigns, and random civil audits. Overall, the study found unreported income of taxpayers in the bottom half of earnings was seven percent. For those in the top one percent of earnings, that figure rose to 20 percent.
Findings of the research include:
- A drop-out in payment of tax liabilities in top tier income earners has a larger impact on the tax gap. The tax gap represents the difference between the amount of tax owed, with what is actually paid in any given tax year.
- Given global tools available to high-income earners, including “legal and financial intermediaries” and offshore tax opportunities in secrecy jurisdiction, understanding tax evasion practices of the wealthy is difficult. As this study shows, though, it is not impossible given the use of micro-data from a variety of resources, including reporting on foreign bank accounts.
- The research notes the relative usefulness of tools of the IRS in detecting tax fraud among high income earners. For example, authors note random tax audits are virtually useless in detecting offshore tax evasion.
- The use of third-party information, increasing the audit rate, and penalties appear to work for deterring tax evasion of middle- and low-income taxpayers. Not so for higher income earners who pursue robust sheltering strategies.
- Study authors suggest, “36 percent of federal income taxes unpaid are owed by the top one percent and that collecting all unpaid federal income tax from this group would increase federal revenues by about $175 billion” each year.
- Pursuing high-income tax fraud requires more substantive administrative resources. Suggested tools include enhancement of whistle-blowing processes to uncover complex evasion schemes, customized audit strategies, and specialized enforcement programs.
The Biden administration has signaled an interest and willingness to pursue high-wealth individuals and companies making use of offshore and other opaque strategies to reduce, eliminate, or evade their tax obligation. It is possible the gravy days of lax deterrent effort against high-income earners are drawing to a close for now.
The report offers a clear look at the high-level tax avoidance. We will see what steps are taken in response. Stay tuned.
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Robert J. Fedor, Esq., LLC delivers skilled guidance on questions of business compliance, criminal tax defense, and tax litigation. If you are contacted by an IRS Special Agent or auditor, contact us to set up a free consultation. We work with clients with domestic and offshore concerns. With offices in Chicago and Cleveland, call us at 800-579-0997 or contact us online.