High-income Americans are evading tax payments to the tune of billions of dollars, according to Internal Revenue Service (IRS) Commissioner Danny Werfel, who admitted that the agency has fared poorly when it comes to auditing this group.
“When I look at what we call our tax gap, which is the amount of money owed versus what is paid for, millionaires and billionaires that either don’t file or [are] underreporting their income, that’s $150 billion of our tax gap,” Mr. Werfel said during an interview with CNBC on Feb. 22. “There is plenty of work to be done.”
He blamed the lack of funding over the past years for the inadequate audit in this category. A scarcity of monetary support resulted in the agency having lower staff levels and starved it of the technology and resources necessary to fund such audits, the IRS commissioner said.
Over the past decade, audits of taxpayers making more than $1 million annually declined by over 80 percent even as the number of such wealthy individuals jumped by 50 percent, the outlet said citing IRS data. “For complex filings, it became increasingly difficult for us to determine what the balance due was,” Mr. Werfel stated.
“So to ensure fairness, we have to make investments to make sure that whether you’re a complicated filer who can afford to hire an army of lawyers and accountants, or a more simple filer who has one income and takes the standard deduction, the IRS is equally able to determine what’s owed. And to us, that’s a fairer system.”
While the IRS claims it intends to use IRA funds to go after wealthy taxpayers, Republicans aren’t convinced. Some GOP lawmakers have criticized the agency’s growing enforcement efforts, claiming that the new wave of audits would turn into a burden for small businesses.
During testimony before the Senate Finance Committee on May 16, Chris Edwards of the CATO Institute said that the IRS intends to assess the income of businesses without accounting for losses.
Cracking Down on Wealthy Taxpayers
This week, the IRS said it was cracking down on improper accounting of business jets by wealthy taxpayers, including launching dozens of tax audits on the use of such aircraft.The U.S. tax code allows businesses to deduct expenses associated with assets like aircraft, provided they are used for business purposes. However, if the jet is used for personal purposes, like an executive flying off to a vacation spot, such costs should be clearly demarcated under personal use.
Mr. Werfel said the audits of companies and partnerships that own jets could lead to the auditing of wealthy taxpayers. The tax deduction from corporate jets can amount to “tens of millions of dollars” for some businesses, he pointed out.
Partnerships are another focus area for the agency in its attempt to target wealthy taxpayers. The IRS commissioner noted that many wealthy individuals were shifting incomes to their business entities to avoid having to pay income taxes.
“What we started to see was that certain taxpayers were claiming limited partnerships when it wasn’t fair … They were basically shielding their income under the guise of a limited partnership,” he said.
During his interview, Mr. Werfel also said that the IRS will be leveraging artificial intelligence (AI) to assess tax evasions.
“Imagine all the audits are laid out before us on a table … What AI does is it allows us to put on night vision goggles. What those night vision goggles allow us to do is be more precise in figuring out where the high risk [of evasion] is and where the low risk is.”
A recent report published by the U.S. Government Accountability Office (GAO) found that as taxpayer income levels rose, “IRS recommended more taxes per audit, on average, but generally closed fewer audits.”
The report said that the IRS still needs to assess its research efforts to “understand the complexity of high-income returns.”
The GAO recommended the agency to “centralize its management of high-income/high-wealth audit programs.”
