We need a robust IRS to stop Wall Street tax evasion

By Aliya Sabharwal, Private Equity Campaign Manager

House Republicans rang in the New Year with a craven attempt to pander to their corporate cronies, making the 118th Congress’ very first vote one to defund the IRS and protect tax evaders. This comes after the agency finally received much-needed funding in last year’s Inflation Reduction Act after years of being under-resourced. 

Chronic austerity weakens tax enforcement and emboldens tax cheats, including the Wall Street private equity executives and corporations who use complex maneuvers to obscure and evade their already minuscule tax responsibility. The ever-expanding private equity industry has systematically minimized the amount of taxes it must pay, using its undue political influence to create a tax code ridden with loopholes and giveaways. Yet modern-day robber barons proceed to evade even these minor levies. They hide funds, misclassify earnings, create elaborate business structures and use offshore tax havens, all while flaunting their extreme wealth and pocketing taxpayer bailouts. Through their vote, every member of the Republican House majority has chosen to use their power in Congress to further embolden these fraudsters.

A vital way to combat these tax cheats and create a more level playing field is to fully fund the IRS. The agency must strengthen its enforcement capacity to pursue the complex, time-consuming, and innovative audit and litigation strategies that are necessary to go after those who habitually abuse the tax system and contribute to the $600 billion annual tax shortfall. 

Americans for Financial Reform Education Fund and its partners have long urged the Treasury and IRS to crack down on the worst abuses of the private equity industry and Wall Street writ large. The IRS absolutely needs the new resources in the IRA to get this job done. In a 2021 letter to Secretary Yellen and the IRS, AFREF highlighted numerous strategies used by the private equity industry to evade their tax responsibility, urged action to shut down these evasion strategies, and applauded the Biden Administration’s call for more resources to enable enforcement. We pointed out that the strategies allowed executives of these firms, often billionaires, to whittle their tax rates down to below what many working people, like nurses, restaurant workers, or teachers, pay in income tax. 

The attempt to concoct a story that increased IRS funding puts regular taxpayers at risk of running afoul of the agency is not only grossly inaccurate, it is farcical. Increasing the IRS’s funding is largely aimed at effective oversight of the top one percent of filers, which include large corporations and the highest-income earners. The Center on Budget and Policy Priorities found that this one percent of filers account for 28 percent of the tax gap. Increasing the IRS’s funding is not only not harmful to regular taxpayers, in actuality, 99 percent of taxpayers would benefit from a robust IRS tax enforcement team. And it’s not only individuals who stand to gain from more equitable tax enforcement. Businesses in other, productive sectors of our economy lacking the means to engage in elaborate financial engineering also have an interest in every firm paying what it owes.

Although the current makeup of Congress makes it unlikely that the vote to defund the IRS will be successful, it is clear that efforts will continue to further rig the already inequitable playing field in which corporations and the one percent have a vast advantage over working people. 

Ensuring that habitual tax cheats pay what they owe requires that the IRS take action which can only be accomplished with a fully funded agency. This includes: 

• Strengthening its oversight and enforcement capacity, dedicating additional staff to focus on private equity tax abuses;
• Fully auditing the monitoring fees that private equity firms use to disguise dividend and shareholder payouts;
• Finalizing its 2015 disguised compensation rule which prevents private equity firms from misclassifying ordinary income as capital gains by establishing clearer conditions in which partners can benefit from capital gains treatment;
• Requiring alternative asset managers to disclose carried interest earnings by mandating that they report carried interest earnings on their annual tax filings;
• Tracing general partners’ earnings through related and tiered partnerships by requiring the reporting of carried interest allocations at every tiered level to better monitor large pools of capital with unknown owners, which could assign tax liability to $200 billion annually, or 30 percent of all income in the partnership sector; and
• Scrutinizing private equity’s use of off-shore tax havens, ensuring that U.S. investors in foreign corporations are not allowed to defer carried interest.

Americans for Financial Reform Education Fund will continue to shine a light on the worst perpetrators of this abuse, chief among them the private equity industry. Together with our partners, we will advance policy and regulatory strategies to ensure Wall Street, and all institutions and individuals that benefit from an inequitable tax code pay their fair share.