Treasury Secretary Janet Yellen calls estimated $7 trillion tax gap 'shocking and distressing'

Treasury Secretary Janet Yellen is calling on the wealthy to pay their fair share of taxes and to close the tax gap by improving tax compliance and audits.

“It's really shocking and distressing to see estimates suggesting that the gap between what we're collecting in taxes on current tax and what we should be collecting — if everybody were paying for taxes that are due — that amounts to over $7 trillion over a decade,” Yellen said during the Atlantic’s Future Economy on Tuesday. “We're trying to make meaningful steps to close that gap.”

The tax gap that would accumulate between 2020 and 2029 is estimated to be $7.5 trillion, according to a 2019 paper by former Treasury Secretary Larry Summers and economist Natasha Sarin. The study found that the IRS could shrink the tax gap by around 15% in the next decade and generate over $1 trillion in additional revenue by conducting more audits that specifically target those at the top.

Recently, the Internal Revenue Service Commissioner Charles Rettig put an even bigger price tag on it, saying that the tax gap "could approach and possibly exceed $1 trillion per year," Rettig added.

In his American Families Plan, Biden allocates $80 billion to the IRS for enforcement with the aim to raise $700 billion in revenue over 10 years by minimizing the tax gap. The increased revenue would come on top of raising taxes for corporations and wealthy individuals in an effort to make them “contribute their fair share,” Yellen said.

‘A fairer tax code in exchange for a higher quality of life’

Biden’s call for IRS funding comes after years of budget and staff cuts for the agency. Since 2010, the IRS has lost 21,000 employees and its budget has declined around 20% when taking inflation into account. The audit staff has declined by a third during that same period, to the point that the 2019 audit rate for individuals was the lowest in over 20 years.

Read more: Top 10 tax mistakes — and how to avoid them

The $80 billion in funding would be used to overhaul technology to improve compliance as well as hire and train auditors on complex investigations of corporations, partnerships, and wealthy individuals. Banks would also have to report inflows and outflows from taxpayers’ accounts, giving the IRS additional information about business revenue and expenses to better target audits

“A well-functioning tax system requires that all taxpayers pay what they owe,” the Treasury Department said when the plan was unveiled. “An unfortunate characteristic of the current system, however, is an asymmetric adherence to tax law by the nature of income received…Noncompliance is concentrated at the top.”

The wealthiest Americans fail to report more than a fifth of their taxable income by using sophisticated forms of tax evasion, a recent study by the National Bureau of Economic Research (NBER) found.

“A fairer tax code in exchange for a higher quality of life for most American families?” Yellen said in a statement when Biden’s tax plan was unveiled. “There are some economic trade-offs that are tough calls. This is not one of them.”

Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova

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