updated 2:28 PM CEST, May 24, 2023

New paper to show 'high-income US tax avoidance far larger than thought'

American households accounting for the top 1% in annual income are managing to avoid significantly more in income taxes than had been previously assumed, a research paper due to be released later today by the Internal Revenue Service and academics will reveal.

Among other things, the National Bureau of Economic Research working paper will show that "the top 1% of households fail to report about 21% of their income, with 6 percentage points of that due to sophisticated strategies that random audits don't detect," according to a preview article published last night by The Wall Street Journal. 

"For the top 0.1%, unreported income may be nearly twice as large as conventional IRS methodologies would suggest," the WSJ article also quotes the researchers as saying. 

It adds that the strategies being used by this wealthy group "include offshore tax avoidance, which may have waned after stricter reporting requirements took effect about a decade ago."

Expatriate tax experts and others familiar with the way expats are currently pursued by the U.S. for taxes say that the report sounds as though it could mean the situation could become even more difficult rather than less, as those with bank accounts outside of the U.S. come under even more scrutiny. 

"This is why holding [Congressional] hearings is essential, in order to have residence-based legislation written and passed by Congress," said American Citizens Abroad executive director Marylouise Seratto, referring to an ongoing effort by expat American campaigners to convince U.S. lawmakers to move the U.S. to a residence-based tax regime, like the rest of the world, with the exception of Eritrea, has.

"ACA’s work on the subject of RBT and our revenue estimates [already] clearly indicate that the community of taxpayers overseas are not the super wealthy, and are not criminal tax evaders.

"Congress needs to be educated on this, through hearings – which ACA believes can happen in this Congress."  

'Partnerships, similar entities to avoid taxes'

According to the The WSJ, the "lead non-government author" of the paper, Daniel Reck, of the London School of Economics, says that in addition to making use of offshore tax schemes, many high-income Americans have also been making use of partnerships and similar entities to avoid taxes, and that such behavior may be increasing, as well as becoming harder for tax authorities to find and untangle.

Added Reck, according to The WSJ: "There is more revenue than you might have thought at the very top.

"What's needed is a broader strategy that involves increased scrutiny of pass-through businesses [and] investments in the comprehensive audits that the IRS does in its global high-wealth program."

IRS Commissioner Charles Rettig referenced the research paper last week, The WSJ said, while testifying before Congress in an effort to get more funding for his agency, in order to boost its enforcement efforts. The IRS has seen its budget cut substantially over the past decade.

According to The WSJ, Rettig argued that each additional dollar the IRS was able to spend on tax enforcement could yield an additional US$5 to US$7 in revenue. 

"It is not just a body count of how many people we have in enforcement," he is quoted as telling the lawmakers. 

"We need to have specialized agents."

Other authors of the paper included John Guyton and Patrick Langetieg of the IRS, Max Firsch of Carnegie Mellon University, and Gabriel Zucman, a University of California at Berkeley economist. 

To read The WSJ article on the paper's website, click here. 

Editor's update: The paper may now be viewed on the NBER's website by clicking here.