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U.S. Likely Failing to Collect $1 Trillion a Year in Taxes

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What You Need to Know

  • Cryptocurrencies and other technologies have created huge opportunities for tax evasion, Sen. Ron Wyden said.
  • The Biden administration’s new budget proposal calls for a 10% increase in IRS funding.
  • Wyden said Republican budget cuts hindered the IRS' ability to detect tax evasion by high-income people.

The actual annual tax gap possibly exceeds $1 trillion per year, IRS Commissioner Charles Rettig told senators Tuesday.

At a hearing held by the Senate Finance Committee on the 2021 tax filing season, Ron Wyden, D-Ore., chairman of the committee, said the tax gap reflects the difference between taxes owed and what’s not being collected from “tax cheats.”

“The most recent official estimate pegs the tax gap at $381 billion per year, but it looks all the way back to data from 2011 through 2013,” he said in his opening remarks. “That means these estimates are out of date as soon as they’re released.”

The fact is, Wyden continued, “our economy has changed and expanded. In 2011, one Bitcoin couldn’t buy you a ham sandwich. Today cryptocurrencies and other technologies create huge new opportunities for tax cheats to rip off the American people.”

Wyden asked Rettig: “What is your personal opinion about how big the annual tax gap actually is?”

Rettig explained that while the IRS plans to issue an updated tax gap estimate next year, the published tax gap estimate is for tax years 2011 to 2013, which has a gross tax gap of $441 billion.

In 2011, “folks were generally unaware of the term cryptocurrency, Bitcoin,” Rettig said, noting that there are more than 8,600 cryptocurrencies in the marketplace and the worldwide market cap for cryptocurrencies is nearly $2 trillion.

Rep. Rob Portman, R-Ohio, said in the hearing that he’s working on a cryptocurrency bill that would “define cryptocurrency for tax purposes and try to provide appropriate reporting rules.”

The tax gap map for 2011 to 2013 “does not include any focus with respect to virtual currencies, which I indicated now is about a $2 trillion market cap” or “much information” about foreign sourced income as well as illegal-source income, “which is still taxable and we do chase,” Rettig said.

Also, Rettig noted that reports issued in the last two weeks by two IRS researchers in the agency’s Research, Applied Analytics and Statistics Organization “indicated that the top 1% of all taxpayers by high income account for as much as an additional $175 billion in the tax gap computations,” which was derived by looking at two issues — pass-through entities and offshore income associated with the top 1%.

“If you aggregate the points that I’m talking about … and there are more — I’ve just referenced the ones most highly visible. If you add those in, I think it would not be outlandish to believe that the actual tax gap could approach, and possibly exceed, $1 trillion per year,” Rettig told the senators.

Wyden said in the hearing that the IRS “needs more resources to tackle this [tax gap] challenge, but it’s only just beginning to recover from a decade of Republican budget cuts,” which he argued “hobbled our ability to root out cheating by high flyers and their high-priced accountants.”

Criminal tax evasion cases, Wyden continued, “have fallen nearly by half. The number of IRS tax enforcement staff — the experts who know how to break down tax evasion cases — has fallen by nearly a third.”

The IRS, Wyden said, “needs more highly skilled investigators and better technology to keep up with these modern crooks.”

He noted that the Biden administration’s new budget proposal calls for a 10% increase in IRS funding.

“That’s a good start. I believe there’s room for a more comprehensive strategy that’ll lower the tax gap,” Wyden said.