Top 1% dodge $163 billion in annual taxes, Treasury estimates

The top 1% of Americans may be dodging as much as $163 billion in annual taxes, according to a report from the U.S. Department of the Treasury. 

This estimate widens the so-called tax gap — the shortfall between how much is owed and collected — to $600 billion every year, the report outlines.

The Treasury doesn’t define income levels on its analysis of the top 1%, but says the lost revenue is equal to all the levies paid by the lowest-earning 90% of taxpayers. 

“I think it’s a timely report because it’s crunch time right now,” said Chuck Marr, senior director of federal tax policy at the Center on Budget and Policy Priorities.

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The report comes as Congress weighs a slate of budget proposals, including calls from President Joe Biden to boost IRS funding by $80 billion over the next decade to fight tax evasion from wealthy Americans.

IRS funding has dwindled since 2010, dropping by 19%, according to the Center on Budget and Policy Priorities, and the agency lost more than 33,378 full-time employees from 2010 to 2020, the IRS reported.

“The IRS has been absolutely devastated,” Marr said. “And it’s been somewhat of a very lax period for people who avoid or evade taxes.”

IRS Commissioner Charles Rettig in August wrote about the agency’s struggles in a letter responding to questions from Sens. Elizabeth Warren, D-Mass., Bernie Sanders, I-Vt., and Sheldon Whitehouse, D-R.I.

“The inherent risk of the current reduced IRS audit coverage levels is that taxpayers may become emboldened to take riskier tax positions, such as overclaiming deductions, underreporting income and not paying what they owe,” Rettig wrote. 

The agency has already started shifting resources to focus on those with complex issues, such as high-income taxpayers, pass-through businesses, international filers and more, according to the letter.    

“Increased funding will allow the IRS to hire additional specialized examination personnel to raise audit coverage in these areas,” Rettig wrote. 

The IRS audited fewer than 2 out of every 100 filers earning more than $1 million, a report from Syracuse University found. 

While audits have fallen across the board, scrutiny has dropped faster for wealthy taxpayers than low- or moderate-income filers claiming the earned income tax credit, according to the Treasury report.

Moreover, Rettig said more disclosures from banks, including basic information about customers’ deposits and withdrawals, may significantly help to close the tax gap.

“What’s critical for Congress to realize is that [the proposal] needs to be comprehensive,” said Marr. “It needs to have the funding for the people, the computers and the information.”  

While lawmakers dropped the measure from the infrastructure bill, there seems to be bipartisan support to fund increased staffing and computers, Marr said. 

But I think the bank reporting requirement is what really needs to be lifted up, he said.

Industry groups, such as the American Bankers Association, the Bank Policy Institute and the Consumer Bankers Association, have argued against the reporting requirements, citing concerns about cost, complexity and privacy.

Still, some policy experts believe increased IRS funding may be passed through so-called budget reconciliation. 

“I expect a continued strong push,” Marr said. “There’s no reason that a robust proposal shouldn’t be in the final bill.”

The Treasury Department estimates $80 billion of IRS funding may bring in $316 billion from 2022 to 2031. However, the Congressional Budget Office projects $200 billion in new revenue over the same period.