America’s richest have found some clever ways to hide their wealth from the IRS

March 23, 2021, 9:38 AM UTC

More than 20% of the wealthiest Americans’ income isn’t being reported to the Internal Revenue Service, according to a new study that calculates U.S. tax evasion is far higher than previously estimated.

Random audits of the rich can detect some tax evasion, but the study’s authors found that the IRS easily misses income hidden in sophisticated ways, including in private businesses and offshore structures. Collecting all unpaid income tax from the top 1% would boost revenue to the U.S. Treasury by $175 billion a year.

“We stress that our estimates are likely to be conservative with regard to the overall amount of evasion at the top,” the authors wrote.

While many forms of income, including wages, are automatically reported to the IRS and easily uncovered in a basic audit, the profits of private businesses and complex investment partnerships are harder to track.

The hidden income at the top means that income and wealth inequality could be more skewed than researchers have previously estimated, the authors concluded. The study was conducted by two IRS researchers, John Guyton and Patrick Langetieg, and three professors: Daniel Reck of the London School of Economics, Max Risch of Carnegie Mellon University, and Gabriel Zucman of the University of California at Berkeley.

Specialized Audits

The researchers suggest the IRS should deploy “additional tools” to “effectively combat high-income tax evasion,” including using whistle-blowers and more specialized audits.

The study could bolster calls by the IRS and others for more funding after years of budget cuts. Among the proposals being discussed in Congress are giving the agency more money to hire specialized auditors and deploy more sophisticated technology, while allowing it to collect much more data, including from banks and other financial institutions.

IRS Commissioner Chuck Rettig told a House panel last week that audit rates for high-income taxpayers have tumbled in the past decade because the IRS has lost key staff that would examine the returns of wealthy individuals.

“Since 2010, we have lost 15,000 enforcement personnel,” he said.

The top 1% saw their net worth rise by about $4 trillion in 2020, capturing more than a third of all new wealth, according to data from the Federal Reserve released on Friday. Meanwhile, the net worth of the poorest half of U.S. households rose $471 billion, just 4% of last year’s overall gain.

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