The IRS could recover $12 for every $1 spent on scrutinizing the ultra-wealthy's taxes

Story by insider@insider.com (Juliana Kaplan) • Yesterday

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A new paper looks at the return on investment from auditing America's highest-earning taxpayers.

Economists find that every extra dollar spent on auditing the top 10% of taxpayers yields $12 in revenue.

However, audit rates have been plummeting over the past decade as the IRS remains underfunded.

It turns out that scrutinizing the rich's taxes pays off.

A new paper from economists at the Department of Treasury, Harvard University, and the University of Sydney looks at the return on investment from IRS audits from 2010 through 2014. They find that while it's much more expensive to audit the wealthiest tax payers, it's still a hearty return on investment. Auditing the top 1% yields $4.25 per dollar spent, and that number soars to $6.29 when auditing the top 0.1%.

And pouring even just a bit more money into auditing the rich could yield a lot more revenue, with every additional dollar yielding up to potentially $12 in revenue from the top 90th percentile of earners.

The findings illustrate how much money might be sitting untapped in what the IRS calls the tax gap — the chasm between taxes owed and taxes paid. America's highest earners are especially adept at not paying their taxes; a 2021 study from the IRS and economists found that the top 1% of earners don't report nearly a quarter of their income. And the top 0.1% under-report twice as much. The Treasury Department has previously estimated that the top 1% evade $163 billion in taxes annually.

That avoidance "has huge consequences. because it just means that low and moderate income families have to pick up a bigger share of our overall cost of government," Amy Hanauer, executive director of the Institute on Taxation and Economic Policy, told Insider.

"It also means that the public services that we all depend on are underfunded," Hanauer said. "So we have less revenue to pay for healthcare and education and higher education and infrastructure and all of the things that our tax dollars support that enable us to have strong communities."

But IRS audits have been plunging over the last decade, as Republican-pushed budget cuts have led to the agency's budget shrinking by over 20%, even as demand grew at nearly the same rate. Audits have especially plummeted for the country's highest earners, according to IRS data, with the audit rate for those earning $10 million or more falling from nearly 14% in 2012 to 9% in 2018, the last year for which the IRS has a good idea of the final rate. They estimate it fell to under 2% by 2020, although the IRS notes that the rate for the most recent years will increase as more audits are opened over time. A 2022 report from the Government Accountability Office found that, from 2010 to 2018, audit rates fell the most for taxpayers making over $200,000.

Part of that is due to the sheer cost of auditing the country's highest earners, who generally have more complex incomes and situation. As the authors of the latest report on audits find, it costs a little over $5,000 to audit someone who's in the bottom half of earners; meanwhile, it costs just over $15,000 to audit someone earning in the top 0.1%. But an audit of a top 0.1% brings in an average of around $95,491, according to the paper — and that also becomes the revenue gift that keeps on giving.

According to the paper, after getting audited, those taxpayers experience what's called the deterrence effect. After getting audited once, they're more likely to keep paying more of what they're supposed to pay. Per the researchers, those extra taxes one-time auditees pay out raise three times as much revenue as the initial audit, and that holds true for the richest tax payers.

But all of that comes as Congress once again strips back IRS funding as part of a debt ceiling bill, potentially leaving the agency without padding to up auditing enforcement and increasing the deficit.

"Republicans insisted on cutting that IRS funding, which makes no sense," Hanauer said. "It's going to reduce our revenue and it's actually going to increase the deficit by close to 20 billion, because we won't collect taxes that are actually owed that we know are owed. So it's really puzzling to me. Are they in favor of breaking the law? Because that's what it seems like