The US Loses Out On $1 Trillion a Year Due to Tax Cheats, IRS Estimates
As part of its oversight role, Congress is constantly assessing the economic health of the United States, so hearing from Internal Revenue Service Commissioner Chuck Rettig that the country may be losing up to $1 trillion a year in evaded taxes is an obvious cause for concern. This estimate is several times the 3-year-cumulative amount of $441 billion that the agency had previously asserted.
In his meeting with the Senate Finance Committee, Rettig said “I think it would not be outlandish to believe that the actual tax gap could approach and possibly exceed $1 trillion per year.” He listed several tax evasion techniques that the agency had not included or even been aware of. Among them were new technologies such as the use of cryptocurrency, as well as more familiar issues such as illegal income, underreporting from pass-through businesses, and offshore tax evasion.
Lawmakers hearing of the disparity between what is collected and what should be collected are vowing to take action. According to Senate Finance Chairman Ron Wyden (Oregon – D) the IRS commissioner’s news should serve as a “wake-up call” to the remarkable revenue losses the government is suffering. He anticipates that his colleagues will take action to facilitate more aggressive tax enforcement, indicating that conversations he has already had with Senator Mike Crapo of Idaho, his committee’s top Republican, indicate bipartisan support. Other senators who have voiced concern include Massachusetts Democratic Senator Elizabeth Warren, who is planning a bill to provide mandatory, steady funding for auditors for the IRS budget; and Ohio Republican Senator Rob Portman, whose focus is on tax-dodging cryptocurrency enthusiasts.
Presidential Action
In addition to congressional action, President Joe Biden has included an extra $900 million in his budget proposal to provide for expanded audits and has included corporate tax enforcement in his $2.25 trillion infrastructure plan. He is also promoting additional individual tax proposals. Responding to questions about what his agency needs to improve enforcement, Commissioner Rettig pointed to 17,000 enforcement-related positions lost over the last ten years and indicated that with $1 billion more in funding, the agency could engage in a multi-year process to update outdated computer systems to flag fraud and tax evasion and hire an additional 4,875 front-line audit personnel. “We want to get there, but we do need your help,” he said. Pointing to the fact that roughly 99% of taxes subject to automatic withholding and reporting are paid while only 45% of those not subject to this oversight are paid, he said that shoring up regulations overseeing tax-return preparers and tax-reporting requirements would close the gap and serve to minimize fraud.
High-Income Individuals and Corporations Hide the Most
According to a recent study, the richest 1% of the American population fail to report or pay taxes on one out of every five dollars that they earn. This evasion is made possible by the fact that income from partnerships, limited liability corporations and other pass-through entities is not automatically withheld in the same way that is done for wage earners. The study’s authors, which include two IRS officials, concluded that eliminating that method of shielding income, as well as offshore structures, would increase the amount of money collected by the IRS by approximately $175 billion each year.
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Frequently Asked Questions
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You can prepare your taxes yourself, especially if your business is simple.
But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.
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Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.
That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.
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Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.
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Possibly, if it was truly for your business and you have proof.
Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.
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Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.
The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.
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