The top 1% of the highest-earning American households are hiding 21% of their income from the Internal Revenue Service, costing the nation of some $175 billion a year in revenue, according to the latest estimation on the cost of tax evasion.
That 1% accounts for more than a third of all unpaid taxes, concluded the study released this month by the Bureau of Economic Research, which included economists from the IRS and several universities.
That’s significantly more than the IRS had previously estimated. Researchers concluded that the estimate is “conservative.”
The money is hidden through a variety of strategies, including stashing billions of dollars in offshore accounts.
The problem stems from a combination of drastic cuts to the IRS budgets, reducing manpower to sniff out cheats, matched against increasingly sophisticated tax dodging that’s more difficult to trace, according to the study. Total funding for the IRS has been cut by close to 20% and the number of staff has been shaved 30% since 2010.
Beefing up budgets and staff alone, as the Biden administration plans to do, could increase tax revenue by over $1 trillion over a decade, The Wall Street Journal reported. IRS Commissioner Charles Rettig has estimated that each dollar spent on tax enforcement could bring in $5 to $7 in revenue.
The percentage of income tax evasion generally increases with the income category, the study found. Taxpayers in the bottom half of income categories evade taxes on around 7% of their income. Taxpayers in the top fifth evade taxes on 10% of their income, with the richest 5% avoiding taxes on at least 20% of income.
Even as high earners are dodging taxes, IRS audits of the wealthy have plunged, another recent study has found. Audits of those reporting incomes over $1 million fell from nearly 50,000 in 2012 to just over 11,000 last year — even as the number of millionaires skyrocketed.
“The IRS needs a lot more resources from Congress,” Daniel Reck, a lead author of the study, told The Washington Post. The agency should “invest in more comprehensive examination strategies, involving audits of individuals, pass-through businesses, and other private entities,” such as charities and trusts, he added.
The IRS “needs to hire and train large numbers of experts to conduct those more comprehensive examinations. They can absolutely do all of this, but budget cuts have severely curtailed their ability to do it,” according to Reck.
President Joe Biden is considering a tax hike for corporations and those earning more than $400,000 a year to fund an infrastructure and jobs package.