WASHINGTON—The top sliver of high-income Americans dodge significantly more in income taxes than the Internal Revenue Service’s methods had previously assumed, according to forthcoming estimates from IRS researchers and academic economists.
Overall, the paper estimates 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. For the top 0.1%, unreported income may be nearly twice as large as conventional IRS methodologies would suggest, the researchers wrote.
These strategies include offshore tax avoidance, which may have waned after stricter reporting requirements took effect about a decade ago. But many high-income Americans also use partnerships and similar entities to avoid taxes, and such behavior may be increasing and becoming harder for tax authorities to find and untangle, said Daniel Reck of the London School of Economics, the paper’s lead nongovernment author.
Such pass-through businesses—where income passes directly onto their owners’ individual tax returns and isn’t taxed at the corporate level—are a large and increasingly important part of the wealth of the top 1%, particularly the top 0.1%. Investment funds, real-estate businesses and closely held family firms across industries are often structured as partnerships.
“There is more revenue than you might have thought at the very top,” Mr. Reck said. “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.”
