Treasury: Super-rich owe $307 billion in unpaid taxes every year

The top 5% of Americans fail to pay an estimated $307 billion in taxes every year, according to a new report from the Treasury Department, with the top 1% owing more than half of that, at $163 billion.

That amounts to approximately half of the estimated tax gap of $600 billion every year, the report said.

“Today’s Tax Code contains two sets of rules: one for regular wage and salary workers who report virtually all the income they earn; and another for wealthy taxpayers, who are often able to avoid a large share of the taxes they owe,” wrote deputy assistant Treasury secretary for economic policy Natasha Sarin.

The report, “The Case for a Robust Attach on the Tax Gap,” comes as the Biden administration is proposing to pay for its ambitious infrastructure and recovery plans in part by beefing up funding for the Internal Revenue Service to close the tax gap between taxes owed and money paid.

“Currently, an under-staffed IRS, with outdated technology, is unable to collect 15% of taxes that are owed, and a lack of resources means that audit rates have fallen across the board,” wrote Sarin. “For the IRS to appropriately enforce the tax laws against high earners and large corporations, it needs funding to hire and train revenue agents who can decipher their thousands of pages of sophisticated tax filings. It also needs access to information about opaque income streams — like proprietorship and partnership income — that accrue disproportionately to high-earners.”

The administration is proposing an extra $80 billion in investment in the IRS over the next decade, which it estimates will generate approximately $320 billion in extra tax collections over the same period, and potentially much more once the decade’s worth of improvements are made to the service.

The Treasury report ascribes some of the higher non-compliance rates among wealthier taxpayers to their ability to hire accountants and tax professionals, but also notes that the rich have access to sources of income that are opaque in terms of reporting. While the IRS receives complete or near-complete information about ordinary wage and salary income (where the noncompliance rate is around 1%), the reporting regime around income sources such as partnership, proprietorship and rental income does not give the information needed to verify that taxpayers receiving that income have paid the appropriate amount of taxes (and so the noncompliance rate for those can reach 55%).