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Study: Wealthiest taxpayers hide 20% of their income from the IRS

| Mar 29, 2021 | Federal And State Tax Collections |

Two IRS researchers and three professors recently conducted a study into how much income the wealthiest 1% of Americans are concealing from the IRS. They concluded that these taxpayers hide an average of more than 20% of their income from tax collectors, which implies that income and wealth inequality are even more pronounced in the U.S.

The study was published by the National Bureau of Economic Research and involved professors from the London School of Economics, Carnegie Mellon University and the University of California at Berkeley.

According to the authors, fully collecting from this segment of taxpayers could increase total tax collections by $175 billion per year.

The authors stressed that their estimates of this type of tax evasion are likely to be conservative.

IRS can’t easily match up some types of income

Wage earners’ wages get reported by both the employer and the employee. Other forms of income are also reported twice, which allows the IRS to easily spot discrepancies. The authors found that this was not the case for private business profits and complex investment partnerships, for example.

The study’s authors recommended that the IRS take specific actions to fight high-income tax evasion, including more specialized audits and rewarding whistleblowers.

Why isn’t the IRS catching these tax evaders?

Last week, the IRS’s commissioner told a House of Representatives panel that the IRS has lost key staff over the last decade who were responsible for auditing wealthy taxpayers’ returns. He mentioned that the IRS has lost 15,000 enforcement personnel since 2010.

Many in Congress were already concerned that the IRS is failing to audit the wealthy at sufficient rates, blaming this on years of budget cuts. Congress has proposed adding funding to allow the IRS to hire more specialized auditors or to deploy sophisticated technology that could spot tax evasion. Additionally, some have proposed giving the IRS the authority to collect more data from banks and financial institutions.