Tax cheats cost the US economy $688 billion in 2021 – the largest shortfall EVER – as IRS pledges to use AI to target ultra-wealthy cutting corners on levies

Americans failed to pay $688 billion in taxes on their 2021 returns, according to a new estimate from the Internal Revenue Service (IRS). 

This is the largest shortfall ever – up more than $138 billion from estimates for tax years 2017 to 2019. 

The agency said it is taking ‘urgent’ steps to increase compliance and reduce the gap, including ratcheting up audits on wealthy taxpayers. 

Part of the $80 billion the IRS received from the Biden administration’s Inflation Reduction Act is being used to go after high earners who skirt their tax obligations – in order to help close the so-called ‘tax gap’.

‘This increase in the tax gap underscores the importance of increased IRS compliance efforts on key areas,’ IRS Commissioner Danny Werfel said in a statement.

‘We are adding focus and resources to areas of compliance concern, including high-income and high-wealth individuals, partnerships and corporations,’ he added. 

‘These steps are urgent in many ways, including adding more fairness to the tax system, protecting those who pay their taxes and working to combat the tax gap.’

The agency said previously that it would not ramp up audits on households earning less than $400,000 a year.  

IRS data shows that the vast majority of Americans pay their taxes voluntarily and on time. 

The overall compliance rate is projected to stay relatively steady at 86.3 percent for the 2021 tax year, after audits and other enforcement actions. 

But hundreds of billions of dollars in unpaid taxes still pile up each year – made up of failed payments through nonfiling, underreporting and underpayments.

The projected tax gap does not take into account late payments or IRS enforcement action. 

The announcement is the first time the agency has provided information on the tax gap on an annual basis – which it plans to do each year going forward. 

‘We are adding focus and resources to areas of compliance concern, including high-income and high-wealth individuals, partnerships and corporations,’ IRS Commissioner Danny Werfel said

It comes after the IRS announced it was using artificial intelligence to crack down on tax violations among the country’s wealthiest.

The agency said last month it had leveraged AI to open investigations into 75 of the largest business partnerships in the US that each average more than $10 billion in assets – including hedge funds, real estate investment partnerships and law firms.

It also said it was prioritizing cases involving taxpayers with incomes above $1 million – but tax debts of more than $250,000. 

The IRS said around 1,600 Americans fall under this category and ‘owe hundreds of millions of dollars.’

Werfel said years of underfunding had ‘led to the lowest audit rate of wealthy filers in our history.’

‘I am committed to reversing this trend, making sure that new funding will mean more effective compliance efforts on the wealthy,’ he added.