Tax Fraud: A $300 Billion Annual Hit to the US
The Government Accountability Office estimated in a report released Friday that the US may be losing more than $300 billion annually in tax revenue due to fraud. The projections from the federal watchdog agency are derived from data spanning 2018 to 2024, a period preceding President Donald Trump’s second term and the subsequent reductions in Internal Revenue Service personnel by his administration. The period also encompassed the Covid-19 pandemic, a time marked by the identification of several high-profile frauds aimed at the government. Republicans have positioned the targeting of “waste, fraud and abuse” as the focal point of their strategies to mitigate the debt, which currently stands at approximately $40 trillion. However, their initiatives have primarily concentrated on curtailing government expenditure rather than addressing tax evasion. Meanwhile, the party has eliminated billions in funding for the Internal Revenue Service that Democrats had designated during the Biden administration to enhance tax compliance.
Last year’s comprehensive tax legislation resulted in a reduction of over $1 trillion from social programs, a move largely defended by Republicans who pointed to the necessity of curbing “waste, fraud and abuse” within Medicaid and food assistance. The GAO’s estimates on tax fraud, which the agency indicated was its inaugural attempt to quantify such losses, projects that fraud reduced revenue by $116 billion to $304 billion annually, roughly 2 percent to 6 percent of taxes owed. IRS chief executive officer Frank Bisignano contested certain findings of the GAO in a letter appended to the report, asserting that the watchdog agency employed an excessively broad definition of fraud, which could be attributed to other prevalent noncompliance issues. The GAO did not establish a connection between IRS funding and the agency’s capacity to identify and combat fraud. Instead, it recommended that the tax collector develop an anti-fraud strategy and form an entity within the agency to coordinate these efforts. Representative Richard Neal, the leading Democrat on the House Ways and Means Committee, asserted that the Republican reductions in IRS personnel have exacerbated the situation. “Democrats were right to make overdue investments into IRS staffing and enforcement against wealthy tax cheats,” Neal said in a statement.
“Trump’s deliberate sabotage of the IRS is making this problem worse, sending audits plunging and opening the door for more fraud. While his billionaire friends continue taking advantage of the tax code, the American people are getting ripped off by a system that’s rigged against them.” In 2022, Democrats designated approximately $79 billion for IRS expenditures over a ten-year period, with a significant portion intended to enhance tax enforcement efforts. The Congressional Budget Office estimated that the increased funding would generate $204 billion in additional revenue over the same period. During the period when the IRS initiated various efforts to address the tax gap, focusing on affluent taxpayers and partnerships, Republicans successfully retracted almost the entirety of the $45 billion allocated for enforcement. The agency has not implemented similarly targeted compliance initiatives during the Trump administration. Bisignano has publicly emphasised the importance of leveraging enhanced data and technology to identify tax evaders and reduce the tax gap.
William McBride stated that increased funding for the IRS could theoretically enhance revenue collections; however, the outcome would largely hinge on the agency’s effectiveness in utilising the allocated resources. “The IRS does not have a great track record of reforming itself,” he said, noting the challenges the agency has faced updating its IT systems. But in general “waste, fraud and abuse” across the government, whether in spending or revenue collections, only account for a small portion of the annual deficit, which sits around $2 trillion, he said. “Even if we totally eliminate fraud, then you see much larger factors are in play, particularly the mismatch between program spending and revenues,” he said. The GAO grounded its estimates of tax fraud losses on documented and presumed cases of tax fraud throughout the specified period, tax gap data sourced from the IRS, investigations into the shadow economy, and fraud estimates derived from international contexts.
