IRS researchers: Top 1 percent avoids taxes on one-fifth of their income

The top 1 percent of households in terms of income fail to report an astonishing 21 percent of their income to the IRS, according to a new paper co-authored by IRS researchers and prominent academics in the National Bureau of Economic Research.

In comparison, the paper found that the bottom half of earners fail to report about 7 percent of their income.

The IRS captures data on most wage income from employers, who report the wages they pay through W-2 forms. Other income, however, earned from freelance work, collecting rent, self-employment and other avenues, must be reported directly.

Of the 21 percent of income unreported from the top tier of earners, 6 percent reportedly comes from avoidance methods that even audits would have trouble finding, such as undeclared foreign accounts and the use of pass-through businesses to hide income.

In comparison to previous estimates, the study finds that unreported income is larger by a factor of 1.1, a figure that rises to 1.3 for the top 1 percent and 1.8 for the top 0.1 percent.

Unreported income will account for some $600 billion in lost government revenues this year, and $7.5 trillion over a decade alone, according to The New York Times.

Though the new analysis focused on a few types of tax avoidance in particular, the researchers said the true figures are even higher.

“We stress that our estimates are likely to be conservative with regard to the overall amount of evasion at the top,” they wrote.

In recent years, audit rates have declined, particularly for the rich, as IRS funding was scaled back. A Congressional Budget Office report from July found that audit rates dropped 46 percent from 2010 to 2018, and fell 61 percent for millionaires in the same time period.

The latest findings, the National Bureau of Economic Research researchers argue, show that tax evasion bolsters inequality.

One of the paper’s co-authors, University of California-Berkeley economist Gabriel Zucman, has made policy waves with his research on inequality before. Sen. Elizabeth Warren (D-Mass.) used much of his work as the basis for her wealth tax proposals.