There’s at least one place Congress needs to spend more of our money sitting in plain sight. Where? The Internal Revenue Service. Why? Up to $1 trillion per year of legitimately owed taxes go unpaid. Right. $1 trillion. A little investment in enforcement and collection would return far more than it would cost. Here are details.
IRS Commissioner Charles Rettig testified last week before the Senate Finance Committee and estimated that as much as, and possibly more than, $1 trillion in legally owed taxes goes uncollected every year.
That’s more than double the $441 billion in yearly uncollected taxes estimated from 2011 to 2013, when the last official annual tax gap estimates were made.
Why? Several reasons. The rise in cryptocurrencies and the increased use of complex, foreign-source income are two. The cryptocurrency sector is lightly regulated and has been an avenue for tax avoidance.
The commissioner also pointed to the abuse of pass-through provisions in the tax code by companies (S corporations and LLCs).
However, most of these unpaid taxes are the result of tax evasion by the wealthy and large corporations, Rettig said.
Not only has the IRS been “outgunned” by increasingly sophisticated tax avoidance schemes in the past decade, but, to save the taxpayers money, Congress has enacted budget cuts leaving the IRS with about 17,000 fewer revenue enforcement staffers than it had a decade ago.
Next year, the Biden administration is proposing a $13.2 billion IRS budget that would include an additional $900 million for tax enforcement starting on Oct. 1. The entire IRS budget is proposed to be up $1.3 billion, or 10.4%, over this year.
How do tax cheats get away with it? They underreport their income, underpay or just don’t pay taxes owed. They also exaggerate tax breaks for deductions and credits.
It takes more than computers to catch them. It takes people and a change in processes. For instance, Rettig told senators, one thing that would help capture unreported income would be requiring transactions in cryptocurrencies, such as Bitcoin, to be reported as we report securities transactions now.
Using 1099 forms to report these transactions would help the IRS capture cryptocurrency capital gains due. Cryptocurrency now has a market capitalization of about $2 trillion.
He added that a recent National Bureau of Economic Research report found that the top 1% of taxpayers by income accounted for an additional $175 billion worth of unpaid obligations per year, based on an analysis focused on pass-through entities and offshore income.
Additionally, Yahoo Money reports that the IRS audit staff has declined by a third for that same period (2010-2019) leading to the 2019 audit rate for individuals being the lowest in more than 20 years.
So, how’s the tax gap measured? It’s not a single number or simple concept. It consists of three parts. There’s the nonfiling part, the underreporting part and the underpayment part. Added together, those represent the gross tax gap. That then is offset by taxpayers who overpay and should be paid a refund. And, even trickier, it’s reduced by taxpayers who would have received a refund if they filed but failed to do so in a timely manner. That’s obviously a statistical estimate. This reduced number then is the net tax gap.
The nonfiling part includes taxes not collected because taxpayers have failed to report timely but might do so subsequently. The underreporting part includes taxpayers who obviously don’t report all their income or who claim unwarranted deductions. And it includes taxpayers who file returns on time with correct amounts but who postpone paying the full amount when due.
As for taxpayers who would have received a refund if they filed but failed to do so in a timely manner, they are estimated by audit statistics or by IRS calculations based on sources such as W-2 wages or 1099s. So, let’s invest more in IRS collection and enforcement. It could reduce everyone’s taxes if we all paid our fair share.