$385 Billion Lost to Tax Evasion

Congress to blame for eliminating IRS Auditors in Budget Cuts.

America’s super rich are once again stiffing Uncle Sam for hundreds of billions of dollars in taxes due.

We're not talking about tax loopholes, such as legal tax code provisions like capital gains, that give the rich preferential treatment with lower tax rates. We're talking about outright tax evasion, the willful misreporting of income.

The IRS periodically tries to measure how much of this cheating goes on. The latest estimate, released this past January puts the tax gap — the difference between taxes owed but not paid on time — at $385 billion.

Some of this gap represents “innocent” tax return mistakes, but most is outright fraud. Taxpayers at all income levels, of course, cheat. But the fiscally consequential cheating comes from the super rich. They cheat at a higher rate than other Americans of modest means and — given the enormity of their incomes — denies Uncle Sam far more tax dollars.

“Conservatives tend to talk about noncompliance as if it were solely a function of tax rates,” as former Reagan administration policy aide Bruce Bartlett noted in the New York Times, a perspective that makes tax evasion “just another excuse to cut taxes.”

In 2001, and then again in 2003, that convenient excuse helped the Bush White House chop away at the taxes the IRS expects rich people to pay. The tax rate on the top tax-bracket income slipped from 39.6 to 35 percent, and the rates on capital gains and dividends both dropped to 15 percent, from 20 and 39.6 percent.

The new IRS study documents that tax evasion actually increased since the Bush tax cuts. In 2001, $290 billion in individual and business taxes due went uncollected. In 2006, $385 billion.

Who’s doing all this tax cheating? Not average Americans.

Average Americans get most of their income from wages and salaries. Almost all this income faces paycheck withholding. The result: The IRS reports that 1 percent of the taxes due on wages and salary goes uncollected, the rest is bilked by the super rich.

Rich Americans collect the biggest chunks of their annual income from capital gains, business ownership, and other sources of income that face neither rigorous reporting mandates or mandatory withholding.

Mitt Romney claims he would stop the "unfairness" in this country, but he will do absolutely nothing to change any part of the tax code that people like him mostly benefit from.

According to rich people-friendly right-wing ideology, the Bush tax cuts should have boosted tax compliance, but just the opposite happened. They more the earned, they more taxes they dodged.

Why can't Uncle Sam get at those lost tax dollars? Have the super rich and their handsomely paid handlers simply become too skilled at squirreling income in tax havens like the Cayman Islands? Do the complexities of the global economy simply make collecting taxes from the rich an impossibly difficult task?

The IRS doesn't think so, but they have a big problem. It's called "congress".

In 2009 the IRS launched a new task force dedicated to auditing the super rich. The IRS Commissioner Doug Shulman predicted early in 2010 that it would bring a “game-changing strategy” to the battle against the ultra wealthy tax cheats and their most sophisticated tax evasion stratagems.

The IRS had needed more funding to conduct the much more intensive field audits on the super rich earning over $10 million a year -- to collect between $200 billion and $300 billion in tax evasion every year. But congress has consistently declined to adequately fund IRS tax-collection operations.

In just the last two years alone, budget cuts have cost the agency some 3,000 enforcement staff positions. The bigger picture: Just 20 years ago in 1992 the IRS had 114,758 auditors to cover a U.S. population of 249.4 million. In 2011, the agency’s staff of only 94,709 had to cover a total U.S. population of 312.6 million.

The tax lawyers, accountants, lobbyists, and private bankers who make up the “income defense industry” for the ultra-wealthy couldn’t be more pleased. They’re making millions by cutting tax corners for the super rich, at precious little risk either to themselves or to their rich clients.

In Greece and Italy, two nations with a history of chronic and massive tax evasion by the rich, tax collectors are now doing that broader scouring. They're checking license plates at elite ski resorts, for instance, to pinpoint high-spenders, then checking the incomes these high-spenders have filed on their tax returns. Aggressive tactics like these are identifying tax evaders that traditional audits have hardly ever snared.

The taxpayers would be more than willing to spend their tax dollars for more tax auditors to make the wealthy pay their fair share of taxes, rather than on lavish conventions in Las Vegas for the GSA. The additional recouped tax revenue (especially with additional penalties and fines) would more than enough to offset the cost of hiring more tax auditors. They could even be hired on a commission basis, and any cost would be negligible.

And if someone is ever caught cheating on their taxes? Give them mandatory prison time...just like Al Capone.

My related posts on tax evasion:

• Mitt Romney: Lobbyists, Special Tax Rates & Tax Evasion
• GOP Claims Tax Evasion as Excuse to Cut Taxes
• How Mitt Romney & the 1% Evades Taxes
• How CEOs are Rewarded for Fraud

* Cheating Uncle Sam By Sam Pizzigati - "America’s richest have seen the top tax rate on their income drop by half since 1980. Apparently, suggests a new analysis of IRS data on tax cheating, they feel they deserve a bigger discount."

* Law and Order 24/7, Except at Tax Time By Sam Pizzigati - "The rich don’t much like paying taxes when tax rates run high. They don’t much like paying taxes when tax rates run low either."