IRS Fails to Pursue Thousands of Rich Tax Cheats, Watchdog Says

(Bloomberg) -- The Internal Revenue Service is letting hundreds of thousands of high-income individuals duck their tax obligations, according to a government watchdog report.

The Treasury Inspector General for Tax Administration found that 879,415 high-income individuals who didn't file returns cumulatively failed to pay $45.7 billion in taxes from 2014 to 2016 and that the agency hasn't tried to collect from many of those taxpayers. The IRS didn't put 326,579 of the cases into its enforcement system, and it closed 42,601 of the cases without ever working on them.

“In addition, the remaining 510,235 high-income nonfilers, totaling estimated tax due of $24.9 billion, are sitting in one of the collection function's inventory streams and will likely not be pursued as resources decline,” said the report, released Monday.

The report defines high-income taxpayers as those earning at least $100,000. The IRS didn't immediately respond to a request for comment, but agency management in the report agreed with a recommendation to prioritize collecting from people who didn't file tax returns.

Earlier: IRS's Failure to Collect From Tax Cheats Could Cost You $3,000

Among those who haven't paid their taxes are approximately 1,891 individuals who owe the IRS more than $1 million, according to the report. The number of people who have been failing to file tax returns -- a crime that could come with steep penalties or as many as five years in prison -- has been increasing in recent years.

‘Cost-Effective Tool'

“Pursuing nonfilers is one of the IRS's most efficient enforcement strategies because issuing nonfiler notices can be a cost-effective tool that requires little more than automated notices,” the report said.

The decrease in enforcement comes as the IRS has faced budget cuts and a 19% decline in collections staff. That has led the agency to send out fewer delinquency notices and pursue fewer nonfiler cases.

Senator Ron Wyden of Oregon, the top Democrat on the Finance Committee, said in a statement that the IRS needed “historic investment” to address the hundreds of thousands of people who are avoiding paying taxes.

“Investments in health care, infrastructure and education will be perpetually short-changed if paying taxes is essentially voluntary for those at the top,” Wyden said.

Failing to collect billions of dollars in unpaid taxes has a cost to taxpayers who follow the rules. The average U.S. household is paying an annual surtax of more than $3,000 to subsidize taxpayers who aren't paying all they owe, the Taxpayer Advocate Service, an independent oversight office within the IRS, found in January. The calculation is based on the assumption that the government is seeking to collect a fixed amount of revenue, leaving compliant taxpayers to pay more to subsidize noncompliance.

The IRS last year estimated the tax gap – the difference between what the federal government is owed and actually collects – averaged about $381 billion in unpaid tax from 2011-2013. That equates to roughly 14.2% of taxes never being submitted to the agency.