According to the U.S. Internal Revenue Service (IRS), taxpayers with incomes of $10 million or more had “substantially higher audit rates” than taxpayers with lower incomes in every year between 2010 and 2015. The IRS examined 8.16% of returns from people reporting $10 million or more in 2015. That’s 1,593 examined returns out of 19,531 total returns filed with incomes of at least $10 million.
The IRS also reported in its most recent data book that the agency audited seven tax returns with incomes greater than $10,000, or just 0.03% of 23,456 filed. That’s not a typo. For incomes of less than $25,000 per year, the IRS examined 137,429 returns out of 36.8 million filed, or 0.28%, four times more than the percentage of top income returns filed.
In the case of the low-income returns, the IRS recommended that 128,521 pay an additional total of $91.6 million in federal income tax. The IRS recommended that of seven high-income returns filed, no additional tax was due.
A new research paper with the provocative title of “Tax Evasion at the Top of the Income Distribution: Theory and Evidence” suggests that the gold-plated honesty of high-income taxpayers is not all it appears to be. The authors (John Guyton, Patrick Langetieg, Daniel Reck, Max Risch and Gabriel Zucman) “show that random audits underestimate tax evasion at the top-end of the income distribution.”
Random audits underestimate the level of tax evasion among top earners because such audits fail to capture most tax evasion practices connected to offshore accounts and pass-through businesses. The more an individual earns, the less evasion is detected by random audits.
According to the authors, “[W]hile the income of taxpayers in the bottom 99% of the income distribution is comprehensively examined, up to 35% of the income earned at the top is not comprehensively examined in the context of random audits.”
So, the rich are cheating. Who knew?
Now, how much are they keeping hidden? The authors begin their calculation by estimating how much evasion is reflected in the random audits and adjusting for the undetected “sophisticated” evasion of the high-income earners. The adjustment, for all tax returns regardless of income is 1.1 times. For the top 1% of incomes the adjustment is 1.3 times, and for the top 0.1% the adjustment is 1.8 times. The result:
[U]nder-reported income as a fraction of true income rises from about 7% in the bottom 50% of the income distribution to 21% in the top 1%. Out of this 21%, 6 percentage points correspond to sophisticated evasion that goes undetected in random audits. …
We estimate that 36% of federal income taxes unpaid are owed by the top 1% and that collecting all unpaid federal income tax from this group would increase federal revenues by about $175 billion annually.
IRS audits of 2018 tax returns resulted in a total of $141.8 million in additional revenue. Not a penny was paid by any taxpayer who earned $10 million or more.