Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Financial Planning > Tax Planning > IRS Updates

Can the IRS Rein In Wealthy Tax Cheats? Ed Slott Is Skeptical

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • IRS has shifted “significant' exam resources to boost its focus on high-income and high-wealth taxpayers.
  • A Treasury IG report found that millionaires owe the IRS more than $2.4 billion in unpaid taxes.
  • Plans to increase IRS enforcement are out-gunned by those wealthy enough to avoid paying their fair share, says Slott.

As new research comes to light showing that high-income earners are evading taxes, IRS Commissioner Charles Rettig told lawmakers in recent testimony that the agency has shifted “significant examination resources and technology” to boost its focus on high-income and high-wealth taxpayers.

Tax expert Ed Slott of Ed Slott & Co., however, is skeptical that federal authorities will, or can, close the tax compliance gap, especially without collateral damage to taxpayers with comparatively modest incomes.

A working paper released Monday by the National Bureau of Economic Research examined tax evasion at the top of the U.S. income distribution using IRS micro-data from random audits, targeted enforcement activities, and operational audits.

Drawing on this “unique combination of data, we demonstrate empirically that random audits underestimate tax evasion at the top of the income distribution,” the authors wrote.

Meanwhile, a just-released study by the Treasury Inspector General for Tax Administration found that millionaires owe the IRS more than $2.4 billion in unpaid taxes.

In testimony Thursday before the House Ways and Means Subcommittee on Oversight, Rettig noted that the IRS launched an initiative last year to improve tax compliance among high-income taxpayers by increasing visits to those generally with incomes above $100,000 who failed to file tax returns in 2018 or previous years.

“Substantially all experienced examiners — those who are the most highly trained with substantial accounting skills — are almost entirely focused on high-income taxpayers and the most egregious situations,” Rettig told lawmakers.

IRS exam rates for closed and in-process exams of taxpayers with total positive income (TPI) exceeding $10 million are about 8.16%; for those with TPI between $5 million and $10 million are about 4.39%; and for those with TPI between $1 million and $5 million are about 2.39%, Rettig reported.

“We are also pursuing those who promote and make use of abusive tax shelters, and are especially concerned about certain variations, including abusive syndicated conservation easements and micro-captive insurance shelters,” Rettig said.

‘Even a Bigger Problem Now’

“Maybe Leona Helmsley was right — only the little people pay taxes,” Slott, a CPA, told ThinkAdvisor Monday in an email. “It’s even a bigger problem now.”

Helmsley made the remark in the 1980s, when “tax rates were substantially higher. But now we have the lowest tax rates many individuals and businesses will ever see in their lifetimes and still (according to new studies — same as the old studies) compliance among the super wealthy is not good.”

Slott stated that “so much lobbying” took place to lower corporate and personal tax rates, “and that was done a few years ago with the massive Tax Cuts and Jobs Act.”

Even with that change in tax law, “there is this huge tax gap — the gap between what is estimated to be owed and what is actually paid,” Slott continued. “So it shows that the very rich don’t like paying taxes at any rate, and will go to extraordinary means to avoid (legal) and in some cases evade (not legal) those taxes.”

Slott maintains that he doesn’t “see a practical solution that does not ensnare all the small fish and burden them with even more reporting compliance.”

Nets cast by IRS and other investigators “don’t seem to be able to pull in the big fish,” Slott added.

“Our nation’s tax compliance is foundationally on the honor system, and that works for most. That’s because most people, honest or not, will still end up paying close to the tax they owe because they know their income is being reported on W-2, 1099 and other income and expense matching items,” Slott explained.

For example, he continued, “years ago you did not have to provide Social Security numbers for dependents you claimed on your taxes, but when that changed around 1986, the IRS reported that over 7 million dependents disappeared from tax returns. Tax compliance has been well over 90% for taxpayers and workers who receive W-2 forms and other forms of income that the IRS already knows about.”

The key, Slott said, “is not how much you earn but how you earn it. There have been proposals to increase IRS enforcement but they are constantly out-gunned by those wealthy enough to avoid paying their fair share.”

The wealthy, Slott said, “have the means to create multiple entities and off-shore shell companies and PO Boxes creating smoke screens and moving funds around the world so much that they can never be located. It’s almost as if this wealth is constantly at sea. I don’t see how throwing more money at these targets will work without unfairly impacting most other taxpayers.”

Take this example, Slott said: “The checking of foreign bank accounts has once again caught some big players, but we have seen cases where people with a house in the Caribbean and a small bank account got hit with huge penalties for not reporting a $3,000 checking account balance to pay home bills on that house.”

This is an example, Slott said, “of enforcement meant for big fish that can harm unintended targets who don’t have the legal resources to battle back. I am sure there must be ways to step up enforcement and collection from the big fish, but they always seem to swim free.”


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.