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

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.”