Treasury Secretary Janet Yellen says a 'shocking' $7 trillion in taxes is going uncollected

• Yellen told The Atlantic that the tax gap was a "shocking" $7 trillion over a decade.
• Her remarks reflect the White House's resolve to collect taxes from high earners and big firms.
• The Treasury has said the tax gap could worsen if no additional action is taken.

Treasury Secretary Janet Yellen said a "shocking" amount of taxes was going uncollected by the federal government and urged additional action to fetch this money from the wealthiest Americans.

"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 in an interview with The Atlantic published on Tuesday.

She added: "We're trying to make meaningful steps to close that gap."

Yellen's remarks emphasize the Biden administration's efforts to collect tax revenue from the wealthiest Americans and multinational companies to finance $4 trillion in spending programs to overhaul the economy. President Joe Biden is also increasingly saying he does not want his plans to swell the federal deficit.

At the center of Biden's planned revenue raisers is a provision to increase funding for IRS enforcement. He also wants to slap investors earning above $1 million with a hike in the capital-gains tax and raise the top marginal income-tax rate to 39.6% from 37%.

The IRS's official estimate is that there is a tax gap of $441 billion a year. But Charles Rettig, the agency's commissioner, recently told Congress that number could be over $1 trillion.

A recent study from IRS researchers and academics found that the top 1% of Americans failed to report about one-quarter of their income to the IRS. The research found income underreporting was nearly twice as high for the top 0.1%, which could account for billions in uncollected taxes.

The gap between taxes owed and taxes paid could grow if there's no intervention, according to the Treasury Department. The department estimated that Biden's proposed $80 billion investment in the IRS could bring in an additional $700 billion over 10 years.

That figure wouldn't include hundreds of billions of dollars in taxes going uncollected each year, Insider's Ayelet Sheffey reported, citing Insider calculations based on numbers reported by The New York Times and comments from the IRS chief to Congress.

Biden's funding would ramp up enforcement on the wealthiest. On the whole, the number of agents devoted to working on sophisticated tax-evasion enforcement dropped by 35% over the past decade, according to the Treasury. The IRS's budget fell by 20% between 2010 and 2018, while audits decreased by 42% from 2010 to 2017. According to a White House fact sheet, there was an 80% decline from 2011 to 2018 in the audit rate for those making over $1 million a year.

Earlier on Tuesday, Yellen suggested the Federal Reserve may need to make "modest" increases to interest rates to prevent the economy from overheating if Biden's plans were enacted. That would step up the cost of federal borrowing and lead to a slower rate of economic growth, a move usually taken to curb inflation.

The decision to raise rates is under the Fed's jurisdiction, not the Treasury's. Yellen later clarified her remarks and said she was not concerned about inflation.

"It's not something I'm predicting or recommending," the Treasury secretary said in an interview at The Wall Street Journal's CEO Council Summit. "If anybody appreciates the independence of the Fed, I think that person is me."