June 23, 2023

Unlocking the Wealth: The Untapped Potential of Auditing the Ultra-Rich

There is a high potential for financial gain by closely inspecting the tax submissions of the ultra-wealthy, according to new research. An investigative study by economists from the Department of Treasury, Harvard University, and the University of Sydney reveals that the Internal Revenue Service (IRS) could see a return of $12 for each $1 used in audits of the richest 10% of earners.

This research, conducted by examining IRS audits from 2010 through 2014, indicates that while auditing the wealthy is costlier, the ROI is substantial. A return of $4.25 per dollar invested is seen when auditing the top 1% of earners, with the return increasing to $6.29 when scrutinizing the top 0.1%.

A significant amount of revenue could be generated by increasing audits of the rich, as the ‘tax gap’, the disparity between taxes owed and actually paid, indicates unexploited monetary potential. Research conducted by the IRS in 2021 showed that the wealthiest 1% of earners fail to report nearly a quarter of their income, with the top 0.1% under-reporting double this amount. The Treasury Department estimates tax evasion by the top 1% to be around $163 billion annually.

Amy Hanauer, Executive Director of the Institute on Taxation and Economic Policy, said that such evasion has severe implications, as it places a higher financial burden on low and moderate-income families while leaving public services underfunded.

The past decade has seen a dramatic drop in IRS audits due to budget cuts prompted by Republicans, leading to a reduction of over 20% in the IRS budget. IRS data suggests that audit rates for high earners have significantly dropped, with those earning $10 million or more seeing their audit rate decrease from approximately 14% in 2012 to an estimated 2% in 2020.

A key reason for the decline in audits is the associated cost. The process of auditing high earners, who typically have complex financial situations, is costly. However, the latest report suggests that auditing the top 0.1% could generate an average revenue of around $95,491, a figure that continues to contribute revenue over time due to the ‘deterrence effect.’

This reduction in audits coincides with the recent cut in IRS funding by Congress as part of a debt ceiling bill. Hanauer critiqued this decision, stating, “Republicans insisted on cutting that IRS funding, which makes no sense. It’s going to reduce our revenue and it’s actually going to increase the deficit by close to 20 billion…So it’s really puzzling to me. Are they in favor of breaking the law? Because that’s what it seems like.”