Closing the Tax Gap: Book Co-authored by Northwestern Pritzker Law Professor Targets Noncompliance by the Wealthy

When thinking about the tax system, Americans often complain that the wealthy pay less than they should because they’re able to employ skilled advisors and complex structures that are not available to other taxpayers.

In the newly released book, Untaxed: The Rich, the IRS, and a New Approach to Tax Compliance (Cambridge University Press, 2024) (available here), Ari Glogower, Professor of Law and Associate Dean of Curriculum at Northwestern Pritzker Law, and co-author Joshua D. Blank, a Professor of Law at the University of California-Irvine School of Law, shine a spotlight on the challenges of high-end tax compliance, and introduce a new legal solution focused on means-adjusted tax compliance rules for higher-income and wealthy taxpayers.

Employing this approach could help close the “tax gap”—the difference between the amount of tax revenue people are obligated to pay and end up actually paying, says Glogower, who is also Associate Dean of Curriculum at the Law School, where he teaches a variety of tax law-related courses. While tax noncompliance occurs at all income levels, it’s more challenging when it occurs among very wealthy people, in part because they have more sophisticated opportunities for tax avoidance.

“As a result, it could often be much more costly for the IRS to detect noncompliance at the top of the income distribution and to enforce the tax laws with respect to these taxpayers,” Glogower argues. “They can often hide their income and their economic activities in complex structures, including pass-through business entities, as well as offshore [accounts]. They have access to more sophisticated tax advice and tax advisors, so there’s also more opportunities to exploit gray areas or ambiguities in the law.”

Failure to collect taxes from wealthier people also creates unique challenges—and can limit the prospects—for progressive tax reform, since there’s less benefit to imposing new taxes on, say, capital gains, if wealthy, sophisticated taxpayers can avoid them, he adds.

Current Approaches—and a New One

Untaxed describes the most common approaches in current law to solving these dilemmas, which typically fall into one of two categories: rules that target certain activities enabling noncompliance (for example, the Foreign Account Tax Compliance Act, which targets offshore entities); and secondly, simply giving the IRS more resources to step up enforcement.

But there are limitations with both approaches, which the book details. For example, the book explains how activity-based rules sometimes unintentionally impact non-wealthy taxpayers and often can be avoided by wealthy, sophisticated taxpayers who can shift their activities to new types of transactions that aren’t targeted by the rules.

“And we’ve seen some of the practical and the political problems with leaning entirely on IRS funding and enforcement as a catch-all solution to tax noncompliance,” Glogower observes. “This approach can be more politically controversial, and also, it doesn’t solve the underlying problem that it’s still often much harder and more expensive to go after certain types of tax noncompliance.”

Glogower and Blank introduce a new approach that can bolster the current activity-based rules and IRS enforcement: means-based adjustments to compliance rules that govern the administration, enforcement and collection of tax liabilities.

As Glogower explains, these rules are essential to a fair and effective system for collecting tax revenues, and cover many aspects of tax compliance, including “procedures for the IRS challenging a taxpayer’s position, potential penalties for noncompliance, the statute of limitations governing how long the IRS has to bring the challenge, the defenses that taxpayers can raise against penalties, [and] the information reporting rules.”

The book rethinks how these rules could operate for high-end taxpayers to meet the unique challenges with tax noncompliance, Glogower says. He and Blank consider questions like when to subject higher-income taxpayers to higher penalties for noncompliance or a longer statute of limitations giving the IRS more time to investigate the tax positions of sophisticated taxpayers, as well as how to handle different penalty defenses they might raise, and what additional reporting requirements might help the IRS detect possible issues.

“Higher-income taxpayers are subject to higher rates of tax on their income,” Glogower says. “That’s how we normally think about progressivity. And this is really a different type of progressivity: Higher-end taxpayers are subject to different tax compliance rules, based on their income.” He also notes that these adjustments should only be made “when they are necessary and warranted to ensure that the tax rules operate fairly and equally for all taxpayers.”

Untaxed concludes with a practical roadmap for policymakers on what this means-adjusted tax compliance system might look like. “The book encourages policymakers, academics, and the public to think more broadly about the tax compliance rules and the tax compliance system itself,” he says. “And it explores the design opportunities to restructure these rules to address some of the unique challenges of tax noncompliance at the top.”

Drawing from Past Research, Teaching

Since graduating from New York University School of Law with a JD in 2012 and an LLM in Taxation in 2013, Glogower has taught and undertaken research at NYU, where he served as assistant editor of the Tax Law Review; The Ohio State University Moritz College of Law, from 2016-2022; and at Northwestern Pritzker Law since then. He also worked in private practice.

The theory and practice of progressive tax design has been an important focus of Glogower’s research since long before he began work on Untaxed. He describes this strand of research as highlighting “that intersection between theories of progressivity and economic inequality, and how they might inform real-world tax design, bringing this literature to the practical problems in designing functioning and fair tax systems.” And, importantly, he adds, how they’re implemented through the tax compliance system. “Otherwise, the tax laws are just words on paper.”

This research led to questions that informed the focus of Untaxed, such as, “What does fairness mean, in taxation? What does fairness mean, in legal design? And particularly, what does fairness mean in the context of tax design?” Answering these questions requires bringing together questions of tax theory and policy with more technical considerations of legal design, Glogower notes.

Glogower also has written about progressive tax reform, in areas like capital income and wealth, and a series of articles about the constitutional constraints on Congress’ taxing power. He is currently working on another series about the historical operation and interpretations of different types of taxes contemplated in the Constitution. “Untaxed touches on some of the constitutional aspects, as well,” he notes. “It considers, for example, what it means under the Constitution to differentiate amongst taxpayers, and to subject them to different tax burdens and different substantive tax rules?”

Glogower’s research and writing also draws from his teaching, which spans income tax, the taxation of business entities, and upper-level seminars on tax policy, theory, and design. While at NYU, his course load also covered tax procedure, “which got me initially interested in a lot of these questions about how these boring procedural rules about the statute of limitations, the timing for assessments and the penalties, the defenses against penalties, and the information reporting requirements, that are all so essential to the functioning of the tax system,” he says.

A recent career highlight for Glogower has been his leadership in organizing an amicus brief submitted for a major U.S. Supreme Court tax case, Moore vs. United States, which was cited in the majority opinion. “We encouraged the court not to adopt a ruling that would fundamentally destabilize Congress’ taxing power and the structure of the income tax system,” he says. “It was exciting that . . . the Court agreed with that path and found a way to uphold the tax at issue in the case on narrower grounds, without getting into some questions [that] were unnecessary to answer in order to resolve the case before the Court.”