The top 1% of households fail to report more than a fifth of their earnings to the IRS, The Wall Street Journal reports.
A new analysis by economists and researchers at the IRS estimated that the top 1% of earners fail to report about 21% of their income, “with 6 percentage points of that due to sophisticated strategies that random audits don’t detect,” the Journal reported.
The top 0.1% of earners may be failing to report twice as much in income as the IRS previously estimated, according to the research.
The researchers estimated that much of the avoidance comes through offshore tax havens, just 7% of which were detected through random IRS audits, and pass-through businesses and partnerships that allow income to pass directly onto owners’ individual income tax and isn’t taxed at the corporate level.
IRS lacks enforcement:
“There is more revenue than you might have thought at the very top,” lead researcher Daniel Reck of the London School of Economics told the Journal. “What’s needed is a broader strategy that involves increased scrutiny of pass-through businesses [and] investments in the comprehensive audits that the IRS does in its global high-wealth program.”
IRS Commissioner Charles Rettig cited the data in an hearing on Capitol Hill last week, pointing to other research that found that the IRS could add an additional $5 to $7 in revenue for every additional dollar it spent on enforcement.
“It is not just a body count of how many people we have in enforcement,” he said. “We need to have specialized agents.”
Bills aim to boost funding, audits:
At least two Democratic bills have been introduced to boost IRS enforcement funding while requiring higher levels of audits of the rich and corporations.
At least one of the bills includes a section requiring third-party verification of business income, meaning it would be treated the same as wage income that is reported through W-2s.
Economists estimate these bills alone could add over $1.2 trillion in additional revenue over the next decade without raising any taxes.