Millionaire Flight is Fake News – This is how the Wealthy evade taxes

            Cracking down on wealthy taxpayers who hide or underreport their income to avoid paying taxes is a big part of the Biden administration’s effort to raise taxes on the wealthy to fund its ambitious legislative agenda (Biden’s American Families Plan cites Guyton et al.’s estimates), but one thing that complicates these attempts at fighting tax evasion is just how widespread it has become among America’s richest households.

To measure the extent of tax evasion, the IRS relies on random audits that measure the amount of income that goes under-reported as a fraction of true income (under-reporting gap), and of the tax that is owed but not paid (tax gap).

In theory, random audits are supposed to provide a pretty accurate estimate of the scope of tax evasion. In the academic literature, as the authors note, it is considered “the gold standard for understanding tax evasion.” The problem, however, is that random audits were designed with common forms of tax evasion in mind: for instance, self-employed people who don’t report their full income, or taxpayers who abuse the tax credit system. When it comes to more sophisticated forms of tax evasion—ones that are used almost exclusively by the very rich—the evasive tactics tend to go undetected, which means that random audits end up underestimating tax evasion at the very top.

To show this, Guyton et al. looked into the thousands of individual tax returns of people who disclosed offshore assets as part of the government crackdown on offshore tax havens that followed the 2008 financial crisis. The authors tracked individuals who filed a Foreign Bank Account Report (FBAR) and individuals who participated in the Offshore Voluntary Disclosure Program (OVDP), an Obama-era program that enabled taxpayers to avoid prosecution by voluntarily reporting previously-undisclosed offshore accounts and paying a fine. Hundreds of these individuals were randomly audited prior to disclosing their foreign assets, and Guyton et al. compare these audits with the post-disclosure returns. What they find is that the auditors detected the hidden offshore wealth in just 7 percent of these cases.

For pass-through entities—partnerships, proprietorships, and S-corporations that are not subject to corporate taxes and whose taxes “pass through” their owners’ individual tax returns—the authors find that among individuals who were subject to a random audit and under-reported their pass-through income, auditors detected the tactic in only 3.8 percent of the cases. The result? “While the income of taxpayers in the bottom 99 percent of the income distribution is comprehensively examined, up to 35 percent of the income earned at the top is not comprehensively examined in the context of random audits.”

Because these forms of tax evasion are highly concentrated among the top earners, accounting for this unreported or under-reported income would significantly increase the income share of the top 1 percent, according to the authors by about 1.5 percent. Of the federal income taxes that are unpaid, they find, 36 percent are owed by the top 1 percent. Among the top 0.1 percent, taxes evaded are more than twice as large.

In fact, the richer you are, the less susceptible you are to get caught evading taxes during a random audit: detected evasion, the authors find, “declines sharply at the very top of the income distribution, with only a trivial amount of evasion detected in the top 0.01 percent.” The reason is that NRP audits detect very little evasion on dividends, capital gains, and interest, the top sources of income for members of the top 0.1 percent. Nevertheless, the authors suggest that 60 percent of the wealth hidden in offshore tax havens belongs to the top 0.1 percent of earners, and 35 percent belongs to the top 0.01 percent.

Such gains held in offshore accounts only became subject to reporting requirements in 2014, after the Foreign Account Tax Compliance Act [FATCA], enacted in 2010, went into effect; the period studied in the paper ended in 2013. When asked whether the picture would be significantly different today, post-crackdown on offshore havens, Reck wrote in an email to ProMarket that this is “a big open question that I am trying to understand better in other work. FATCA shows some promise but there’s a lot of uncertainty and disagreement out there about how optimistic we should be that it is making a big difference.”

The reason that the very wealthy often get away with evading taxes, the authors suggest, is simple: auditors attempting to wade through networks of pass-through business entities and offshore havens to determine whether the income reported in an individual tax return is correct face considerable challenges in deciphering byzantine ownership and partnership structures. It takes significant expertise, resources, and personnel to detect evasion at these levels—things the IRS, in its current diminished form, does not have enough of.

Also, readers interested further should read the NBER report cited by the author of the article and which I cited and linked above.  From the article here are some key excerpts:

(excerpts from http://federaltaxcrimes.blogspot.com/2021/06/article-and-study-on-tax-evasion-by.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FoGeEWy+%28Federal+Tax+Crimes%29)