The IRS has a new web page titled “Impacting the Tax Gap” here. The page is a summary of Commissioner Rettig’s comments which are set forth in a linked pdf here. Commissioner Rettig’s comments are excellent. Highly recommended.
I will cut and paste the comments I think most relevant to readers of this Federal Tax Crimes Blog (footnotes omitted; I stated the categories of the report but only include the text under the category relevant to criminal matters so some comments will not be included; I do not state the page numbers but searching the pdf can get the pages):
Research on high wealth noncompliance
Several RAAS researchers recently participated in a study published by the National Bureau of Economic Research (NBER) entitled “Tax Evasion at the Top of the Income Distribution: Theory and Evidence.” This study examined tax evasion at the highest income levels and estimated that the top 1 percent of Americans hide more than 20 percent of their income from the IRS. With more, specialized, and targeted enforcement resources, the IRS could significantly reduce the income tax gap for the top 1% and collect another $175 billion of taxes annually.
As to why sophisticated tax evasion seems so concentrated at the top, the study suggests that (i) concealment of tax evasion from auditors is costly, requiring substantial financial sophistication, (ii) high-income people can save huge amounts of tax with little risk by adopting sophisticated strategies, which makes it worth the cost, and (iii) audit rates are relatively high at the very top of the income distribution, so if the audits are not thorough enough to correct sophisticated evasion, then high audit coverage rates themselves incentivize the concealment of tax evasion.
A key difficulty in identifying tax evasion by the wealthy is the complexity of the forms of tax evasion at the top, which can involve legal and financial intermediaries, sometimes in countries with a great deal of secrecy. Income flows from assets outside of 3rd party reporting requirements or obscured through multiple layers of ownership make it difficult to associate the income with specific individuals. The study estimated that accounting for offshore and undercounted pass-through evasion alone could identify an additional $110 billion in undetected income which would have resulted in an additional $33 billion of taxes annually.
