Commissioner Rettig Tax Gap Comments Relevant to Federal Tax Crimes (4/28/21)

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.

            The study concludes that effective tax enforcement at the very top of the U.S. income distribution requires a comprehensive approach, including:

            • Greater scrutiny of pass-through businesses.

            • More comprehensive audits, such as those conducted in the IRS Global High Wealth program.

            • More thorough litigation of tax disputes.

            • New regulations to clarify that certain activities are noncompliant.

            • Programs to encourage whistleblowing.

 Examination Enhancements

 • Office of Fraud Enforcement. Within the past two years, we launched our Office of Fraud Enforcement (OFE) where technical advisors provide fraud policy and operations support to all IRS operations. Damon Rowe, the Executive Director of the OFE, is a longtime IRS Criminal Investigation (IRS-CI) veteran. OFE has expanded fraud awareness Service-wide by holding “Fraud Bootcamps” (advanced technical training) to more than 12,000 front line examiners, Managers and Chief Counsel personnel during the first quarter of 2021. Compliance examiners have a commitment to general fraud awareness and each Operating Division provides quarterly or more frequent non-taxpayer specific reports to the Commissioner regarding their activities in this area. As an example of their efforts, OFE has a new project “Operation Hidden Treasure” focused on the development of various signatures associated with the hidden ownership of virtual currencies to better enable the IRS to pursue undisclosed taxable transactions. A substantial portion of the OFE caseload involves high-income/high-wealth individuals and their controlled entities.

• Office of Promoter Investigations. Within the past year, we have created an Office of Promoter Investigations (OPI) focused on taxpayers and the promoters of abusive tax avoidance transactions, including abusive Syndicated Conservation Easements, abusive Micro-Captive insurance arrangements, virtual currencies, offshore  [*12] transactions, and other transactions. Substantially all of these transactions are engaged in by high-income/high-wealth individuals. OPI coordinates Service-wide enforcement activities most often interacting with our LB&I division, our SBSE division, our TEGE division, the Office of Chief Counsel, OFE and, when appropriate, Criminal Investigation (IRS-CI).

 Collection Enhancements

            “Operation Surround Sound” represents a coordinated effort among our Collection Division, Exam, OFE and, when appropriate, Criminal Investigation to identify and pursue the most egregious High-Income Non-Filers (HINFs) from their sweeps. High-income taxpayers with [*13] balances due receive high prioritization for enforcement action. For taxpayers who fail to file a return, we have programs that address their compliance through notices as well as field presence. All High-Income Non-Filers (HINFs) for tax years 2016, 2017 and 2018 received a notice, and we intend to continue selecting all HINF cases for tax years 2019 and beyond.

 Criminal Investigation Division

            Most investigations conducted by IRS-CI involve high-income individuals and their advisors. Our Nationally Coordinated Investigations Unit (NCIU) supplements case development by identifying, promoting, and supporting innovative investigations, delivering high-impact investigations, and addressing emerging issues to advance the mission of the IRS and IRS-CI. During the past year, IRS-CI has conducted approximately 450 undercover investigations, many focused on high-income individuals and their advisors. If completion of a criminal investigation leads to an indictment by the Department of Justice, the publicity surrounding the indictment often has a deterrent effect helpful to tax administration.

            Over the last year, IRS-CI has also been combatting COVID-19 fraud related to the Economic Impact Payments, Paycheck Protection Program (PPP) and Employee Retention Credit. The agency has investigated more than 350 tax and money laundering cases nationwide totaling $440 million. These investigations covered a broad range of criminal activity, including fraudulently obtained loans, credits and payments meant for American workers, families, and small businesses. Additional resources will allow us to expand the nature and scope of these IRS-CI investigations.

 Mitigating the Tax Gap Through Legislative and Other Considerations

 • Making repeated willful failure to file a tax return a felony.