Key concepts and definitions

We begin with the definitions of tax evasion and tax avoidance. Even on semantic questions, there are important differences between the bottom 99% versus the top 1%. In public discourse and much writing by tax economists, tax evasion typically refers to using illegal means to reduce one’s tax payments. Tax avoidance refers to reducing one’s tax payments legally, without incurring real economic costs. The condition that tax avoidance does not incur real costs distinguishes avoidance from so-called real responses to taxation, such as quitting one’s job, that do incur costs. This trichotomy – evasion, avoidance, and real responses – forms the core of how most economists think about behavioural responses to tax incentives [1].

Legal writers use these terms differently, and the differences are illuminating [2, 3]. The term evasion is generally reserved in legal writing for intentional under-payment of tax.¹ The laws of many countries define a crime called tax evasion, and proving that someone committed this crime usually requires establishing intent.² To describe any under-payment of tax, intentional or not, tax lawyers and authorities tasked with enforcing the law usually use the term non-compliance. Meanwhile, legal writers often reserve the term avoidance for tax reduction strategies that exploit ambiguities in the tax law or loopholes that lawmakers opened unintentionally, that is, without referring to a distinction based on real economic costs. In complex situations where there is uncertainty about what the law allows, moreover, one can adopt a position that reduces one’s tax burden, but which may or may not withstand scrutiny were it competently litigated and adjudicated. Legal writers often call such behaviour ‘avoidance,’ even though some of the underlying behaviour may be unlawful.³

We illustrate the subtleties in the definition of ‘tax avoidance’ with two examples. The first example is the well-known strategy of ‘tax loss harvesting.’ To do this, investors who have realized capital gains in a given year can, in that same year, realize capital losses that offset the taxes on their capital gains. No one doubts the legality of tax loss harvesting,⁴ and both wealthy and not-so-wealthy taxpayers do it [4], though the wealthy likely benefit more because they have larger, more complex portfolios. For an economist, tax loss harvesting is clearly tax avoidance because individuals can reduce their tax burden while incurring negligible real costs. However, some tax lawyers would not call this behaviour tax avoidance, because tax law expressly permits it.⁵ Often experts use additional terms like tax planning for such behaviours.

Our second example is the US conservation easement. US law allows landowners to donate the development rights on their land for conservation purposes and claim an income tax deduction equal to the effect of the donation on the ‘fair market value’ of the land (i.e., the value of the foregone development rights). In practice, the legal standard for a fair market value in this domain is weak. In many cases, the deduction taxpayers claim massively exceeds the value at which the land itself was recently purchased [5, 6]. There are also ‘syndicated’ conservation easement schemes, in which many people invest in a company that exploits a conservation easement, thereby generating an exorbitant return on investment entirely driven by tax reductions. From an economists’ perspective, such aggressive valuations cannot possibly be consistent with fair market valuations, but purveyors of syndicated conservation easements nevertheless contend that the law allows them to do what they do. The IRS and many legal experts disagree. Combating this type of avoidance can require lengthy litigation. Legal writers typically call these types of schemes tax avoidance, while an economist is more likely to place them in the grey area between avoidance (legal) and evasion (illegal).

Unlike tax loss harvesting, exploiting a conservation easement requires sophistication and professional advisors, so this scheme is generally the sole domain of HIHW individuals. In fact, many sophisticated grey-area avoidance strategies involve hard-to-value assets, and virtually all the strategies that we know of are employed predominantly by the very wealthy. One should keep this in mind when invoking the old platitude that ‘the poor evade, and the rich avoid.’ In fact, the rich evade and avoid. And much of what legal writers and, especially, lawyers representing wealthy taxpayers will call ‘avoidance’ is not unambiguously lawful.

Henceforth, we will use ‘tax evasion’ to refer to behaviours that violate tax law, intentionally or not. We do not discuss unambiguously legal tax avoidance further. We do discuss the adoption of dubious legal positions and call this ‘grey-area avoidance,’ noting that the portion of grey-area avoidance that is not lawful overlaps, according to our definitions, with tax evasion.

Economic Theory

Economists’ predominant theoretical framework for thinking about tax evasion relies on three main elements: deterrence, third-party information, and tax morale. To model deterrence, one views tax evasion as a form of risk-taking, by which someone tries to reduce their tax bill but risks punishment if they are detected. In deterrence models like the canonical work by Allingham and Sandmo [7], the likelihood that evasion is detected and the penalties for evasion are critical policy determinants of tax evasion, because they control the strength of deterrence. The second element is third-party information reporting. Tax authorities requisition information from third parties like employers and financial institutions, which they can use to check that individuals are reporting accurately. Empirical evidence from audits suggests that where robust third-party reporting occurs, such as for wage and salary income, tax evasion is minimal [8, 9]. The third key element, tax morale, incorporates ideas from psychology and behavioural economics, which suggest individuals have motives for paying taxes that are not captured by models of informed, self-interested decision-making [10]. Motives such as the ethical desire to tell the truth can partly explain, for example, why taxpayers might comply in the absence of deterrence incentives and third-party information [11]. We have not seen evidence that tax morale has as strong an effect on evasion as robust third-party information reporting.

This three-pronged framework for understanding tax evasion falls short when we turn our attention to the HIHW population. First, existing research largely neglects actions that taxpayers take to make their evasion more difficult for authorities to detect. As we shall see, these types of more sophisticated evasion are prevalent among HIHW persons. Second, economists often study tax avoidance completely separately from tax evasion [1], and there has been little work in economics on grey-area avoidance strategies. Relatedly, most studies that test the predictions of models of evasion studies mainly the bottom 99% of the income and wealth distributions [12].⁶

Random Audits and their Limits

Until recently, most academic and government research on the individual tax gap came from the analysis of data from random audits of tax returns [8, 9]. If audits detect all tax evasion, then auditing a random sample of tax returns would allow researchers to paint a comprehensive, representative picture of tax evasion. Of course, audits do not actually detect all evasion. Researchers at the IRS and, recently, in other countries have used statistical methods to account for undetected evasion, leveraging for instance the fact that some auditors appear to detect systematically more evasion than others [9, 14]. However, these statistical methods shed little light on the HIHW population specifically, and they do not account for forms of evasion that are undetectable for even highly skilled auditors [15]. Where grey areas are concerned, tax gap research usually defers to auditors’ assessments and interpretations of rules, which creates some additional limitations [15, 2].

Consequently, according to recent research, existing random audit data teach us a great deal about individuals in the bottom 99% of the distribution, but they yield comparatively fewer insights into tax compliance among HIHW individuals. Using additional data, the literature suggests that the tax gap among HIHW individuals is likely much larger and much harder to measure than random audit data alone would suggest.

Offshore Tax Evasion

Several recent studies have focused on tax evasion via offshore financial intermediaries. This literature has grown in parallel with public interest and a multi-pronged effort by policymakers around the world to combat offshore tax evasion.

One set of papers finds that the value of assets held in tax havens is quantitatively large and important [16, 17, 18]. Zucman [16] showed that wealth held in offshore tax havens causes large distortions in statistics on the international investment positions of most countries. Building on these discrepancies and some supplementary macroeconomic statistics, Alstadsæter et al. [18] estimated that about 10% of world GDP is held in offshore tax havens. At the country level, they estimate that offshore wealth as a share of GDP is extremely large in a few countries, at over 40% in Russia, Venezuela, Saudi Arabia, and the UAE, while it is more modest in most other developed countries, including just over 7% in the US and 3–6% in Scandinavian countries.

The available evidence suggests that most of this wealth was undeclared and untaxed. United States Senate reports [19, 20] estimate that 85%–95% of accounts held by US clients of prominent Swiss banks were undeclared to the IRS before FATCA; Johannesen and Zucman [21] and Roussille [22] estimate that 80–90% of the wealth held in Switzerland by Europeans was undeclared, and Alstadsæter et al. [23] find that 90–95% of all accounts held in HSBC Switzerland by Danish and Norwegian taxpayers were not reported either. Importantly, however, we have virtually no evidence about compliance for wealth in tax havens besides Switzerland.

How much does offshore wealth contribute to the tax gap? With a few percentage points of GDP held in offshore tax havens, offshore wealth is unlikely to make a massive difference in percentage terms for the overall tax gap, except perhaps in those countries where it is a much larger share of GDP. For example, Guyton et al. [24] estimate that the US lost about $15 billion in income tax revenue from offshore tax evasion in 2007, which is about 3% of the overall tax gap and 6% of the tax gap for income taxes in this year [25].⁷⁸

Although offshore tax evasion is a small share of the total tax gap, it is a large component of tax evasion by high-wealth individuals. Figure 1 illustrates this fact with the findings from two recent studies of Scandinavia [23] and the US [24]. These studies use data on portions of evasive offshore wealth that became visible recently, due to leaks or individuals’ coming into compliance during policy crackdowns. Such data reveal that offshore wealth, and thus offshore tax evasion, is extremely concentrated among those at the very top of the income or wealth distribution. Even if there is uncertainty in identifying the exact concentration, multiple sources of data in both the US and Scandinavia tell a broadly consistent story. They suggest for instance that 55–77% of offshore wealth belong to the top 0.1% of the wealth distribution.

Alstadsæter et al. [23] and Guyton et al. [24] quantify the possible importance of concealed offshore wealth in terms of the extent of tax evasion according to income or wealth distribution. Using comprehensive wealth records in Scandinavian countries, Alstadsæter et al. [23] find that offshore tax evasion increases the fraction of taxes unpaid from about 4% to over 25% in the top 0.01% of the wealth distribution; Guyton et al. [24] estimate that it increases the fraction of unreported income from less than 1% to 4% in the top 0.01% of the income distribution.⁹ These estimates are uncertain and only include evasion of taxes on financial capital income.¹⁰ They also pertain to the period preceding the international crackdown on offshore evasion. How much of a difference the crackdown made is a difficult question that we discuss in the next section.

Comparing these results between studies provides clues about how the tax system of a country shapes the sophisticated evasion that occurs there. The estimates of the quantitative importance of offshore evasion at the very top of the distribution are much larger in Scandinavia than in the US, partly because the Scandinavian estimates include evasion on wealth taxes that the US does not have, and because the rates of tax on financial capital income are relatively higher in Scandinavia.¹¹ Guyton et al. [24] show, however, that offshore tax evasion is not the only form of sophisticated tax evasion by the wealthy that is significantly under-measured in random audit data. Another important channel is tax evasion via complex businesses, which we turn to next.

Evasion via Business Entities

An important development in the US tax system in recent decades is the rise of pass-through businesses – namely S corporations and partnerships. In these, income passes through to owners for tax purposes rather than being taxed under the corporate income tax. For businesses with few owners, there is essentially no third-party reporting over business income, as owners can control what income the pass-through business reports. Between 1980 and 2013, 41% of the increase in the top 1% income share is attributable to rising pass-through business income, as this income primarily goes to the top 1% of the income distribution [27].¹²

The complexity of pass-through businesses creates opportunities for sophisticated tax evasion.¹³ Analyzing the returns filed by pass-through businesses to allocate their share of income to their owners, Cooper et al. [27] find that more than 30% of partnership income cannot be traced back to an identified owner. Instead, 20% of partnership income flows to unclassifiable partners and 15% to circular partnerships (e.g., partnership A owns a share of partnership B, B owns a share of C, and C owns a share of A). Relatedly, the offshore world and the world of pass-through businesses are not entirely distinct, in ways that we are just beginning to document empirically. For example, Love [28] shows that more than $1 trillion of income reported to the IRS by partnerships between 2011 and 2019 went to foreign owners in tax havens, with a large proportion of such income sheltered from US taxation through intermediate ‘blocker entities’. These can be used for legal avoidance, but they can also facilitate tax evasion.

Because of pass-throughs’ complexity, detecting tax evasion occurring via pass-through businesses is difficult; very little evasion on pass-through income is detected in US random audit data. Comprehensively auditing an individual’s pass-through business income would require auditing at least another business, if not a network of them, so auditors conducting random audits very rarely examined the tax returns of associated pass-through businesses. Guyton et al. [24] find that estimated evasion for pass-through businesses in individual random audit data is much smaller than one would expect given estimates for other businesses or random audits of pass-through businesses themselves.¹⁴ Building on these supplementary sources of data, they estimate the importance of pass-through evasion for the overall rate of under-reporting of income through the income distribution in Figure 1d. Accounting for pass-through evasion raises the rate of income under-reporting from 4% to 9%. This is almost double the effect of accounting for offshore evasion, reflecting the relative importance of pass-through business structures for wealthy US taxpayers.

Profit shifting

Finally, the wealthy are likely beneficiaries of evasion on corporate income taxes, because ownership of large corporations is highly concentrated.¹⁵

Though most of the literature on corporate profit shifting and other tax sheltering uses the term ‘avoidance’, these strategies often constitute grey-area avoidance [33]. This fact is evidenced by the frequency of corporate tax disputes, with almost half of the additional tax levied by the IRS on US C-corporations in 2020 disputed by these corporations (see Table 1). Furthermore, a number of well-known avoidance strategies involve the sale of intellectual property (e.g., a software patent) from the home country to a subsidiary in a low-tax country. In order to derive value from such a scheme, the US parent must sell the IP below its fair market value. Arms-length transfer pricing rules aim to prevent exactly this, but they struggle to because the market value of intellectual property is often ambiguous. Such practices may therefore be de facto legal because existing anti-avoidance rules cannot prevent them but de jure illegal because of under-valuation.

The overall extent of corporate sheltering activities is large. By comparing the profitability of foreign firms to that of domestic firms, Tørsløv et al. [34] estimate that about 36% of multinational profits are shifted to tax havens ($600 billion in 2015). US multinationals shift a particularly high share of their earnings to low-tax jurisdictions.¹⁶ The estimated loss for the US government ranges from about 20% [17] to more than 40% [36] of corporate tax revenues.¹⁷

Typology of Policy Responses

Table 2 summarizes each step of the tax enforcement process, along with a description of the key policy decisions that influence each step, the challenges policymakers face in making these decisions, and some examples of empirical research on each step.

The first step is to define tax liabilities and penalties for evasion. This is a crucial one because failure to write clear and enforceable rules can create ambiguities or outright loopholes. Given their financial sophistication and access to professional advisors, high-wealth taxpayers are especially likely to turn to their advantage any ambiguities or legal sheltering opportunities.

Once tax liabilities are defined, the next step is to gather information from taxpayers and from third parties to administer these liabilities. Because of the growing consensus about the importance of third-party information reporting, this is probably the step on which the most economic studies about tax enforcement have been written, while other steps have received comparatively less attention. There has also been little work on the information that should be reported by taxpayers, but, especially in complex circumstances, ‘first-party’ reporting rules matter. For example, these reporting rules govern the extent to which US pass-through business income can be linked to owners using the information reported on tax returns, especially when the owners are foreign persons [27, 28]. For another example, policymakers in some countries require that taxpayers self-report when they undertake specific tax avoidance schemes, which helps tax authorities identify, track and deter grey-area avoidance [42].

Following the reporting of information to the tax authority, the tax authority must decide which returns to scrutinize, that is, whom to audit. A number of papers discussed above employ data from random audits, but most audits are non-random and selected based on suspected non-compliance. The evidence base on the causal effects of policy interventions here, such as to improve the selection of audits or to increase audit rates, is relatively thin.¹⁸ An important part of the effect of a change in audit policy is the effect on taxpayers’ reporting behaviour, that is, the deterrence effect. Studies on the effects of receiving threatening letters from the tax authority or the effect of being audited on future reporting behaviour suggest that deterrence effects are potentially large and significant [12]. However, we have very little empirical evidence on the deterrence effects of changing (non-random) audit rates, as most studies on the revenue return to increasing audit rates do not account for deterrence (see Table 2). Existing studies also do not focus on the HIHW population, even though, in this population, audit rates are relatively high, tax liabilities are quite concentrated, and tax positions are relatively complex. Moreover, the evidence in Guyton et al. [24] suggests that the type of audit and audit procedures matters a great deal for high-income taxpayers due to their sophistication. Some audits, like those conducted within the IRS Global High Wealth Program, are more thorough and sophisticated [43]. Separately, we note that the prior step on reporting rules has downstream implications here: better reporting rules provide the tax authority with more useful information, which it can use to improve the audit selection process.

Following audits, examiners assess additional taxes and penalties for non-compliance. One key question here is the nature of the penalty, which can range to simply paying back taxes, to minor financial penalties, to criminal prosecution and prison time. In practice the latter is extremely rare.¹⁹ In the US, for example, wealthy taxpayers adopting grey-area avoidance strategies sometimes obtain letters from legal experts arguing that their position is compliant, which provides a shield against criminal penalties – recall that proving criminal evasion requires establishing intent.

Next, if taxpayers disagree with their assessments, they can dispute them. Resolving these disputes can entail substantial costs for both the taxpayer and the government. Due to ambiguities in the rules and the risk of mistakes, disputes are common, and tax authorities must decide how to allocate resources to disputes. Disputes are especially common among HIHW taxpayers: in the US, over 50% of assessed tax is challenged at the very top of the distribution, in comparison to less than 20% for most of the population [24] (see also Table 1). That these disputes in the US are often settled in the taxpayers’ favour has led many observers, including the current commissioner of the IRS, to argue that in attempting to collect tax from sophisticated high-wealth taxpayers, the IRS is often legally ‘outgunned’ [44].²⁰

Finally, after disputes are resolved and the amount of tax someone owes is determined, the IRS must collect any additional taxes due. There has been public discussion here around questions like whether the tax authority should recoup taxes owed by garnishing wages. For the high-wealth population, however, the collections process is seemingly a less pressing policy concern: once disputes are resolved, these taxpayers pay what they owe.

In summary, while the economic literature has mainly focused on information reporting, reflecting the economists’ underlying view of tax evasion as an asymmetric information problem, a number of other inter-connected components of tax enforcement policy are essential to limiting tax evasion and legal avoidance by high-wealth individuals. The next wave of tax enforcement research should focus on these other types of policy interventions.

Case Study: Cracking Down on Offshore Evasion

Prior to recent reforms, auditors faced challenges in detecting offshore tax evasion because of a lack of information [24], a challenge for the second phase of the enforcement process described above. Consequently, governments have focused a large part of their enforcement efforts on acquiring information from offshore financial institutions, especially in countries where concealed assets tend to be located.

We can distinguish roughly two waves of policies aimed at curbing offshore tax evasion. In the first wave, governments focused on gathering information from specific countries or financial institutions. Following Birkenfeld’s 2007 whistleblowing, the US government sued the Swiss Bank UBS for helping Americans to evade taxes. UBS ultimately settled, paying a $780 million penalty, and providing the names of its American clients to US authorities [46]. The US then took similar action against several other foreign banks. The US and many other governments also used offshore voluntary disclosure programs (OVDPs), which allow taxpayers who voluntarily disclose their previously unreported offshore assets to pay reduced penalties and/or to avoid criminal sanctions. The OECD reports that more than €37 billion has been identified under such programs over the 2009–2014 period [68].²¹ Additionally, to help detect noncompliance, G20 countries from 2008–2009 pressured tax havens to sign bilateral Exchange of Information upon Request (EoIR) treaties;²² allowing tax authorities to requisition information from a partner administration if they suspect wrongdoing. However, the scope of this first wave of measures was possibly too narrow, as many of these measures targeted specific countries or financial institutions.

Consequently, countries have recently adopted broader Automatic Exchange of Information (AEoI) policies, enabling governments to solicit financial information on all of their taxpayers with assets in other countries. The US introduced unilateral AEoI under FATCA, which was implemented starting in 2014. Shortly thereafter, the OECD initiated a multilateral AEoI agreement, the Common Reporting Standard (CRS). The CRS is the most ambitious measure addressing offshore tax evasion as it establishes AEoI between over 100 jurisdictions, including the major tax havens. As such, AEoI policies and the CRS in particular have been shown to be relatively effective at decreasing the amount of wealth held in tax havens [49, 50, 51].

Throughout, the focus of the offshore crackdown has been on the ‘third-party reporting’ step of the enforcement process outlined above. The effectiveness of these measures in deterring evasion depends on the relative costs and benefits of three alternatives faced by previously evasive taxpayers: comply, dodge new reporting requirements, or do nothing. Available evidence provides a number of clues regarding the importance of these three possible responses for the current global crackdown. Johannesen et al. [46] show that following the first wave of enforcement in the US starting around 2008, US taxpayers disclosed about $100 billion in offshore wealth, that is perhaps 10% of Americans’ total concealed wealth according to prevailing estimates at that time [17].²³ Regarding the second, more comprehensive wave, FATCA in the US, De Simone et al. [51] find that investment out of financial accounts in tax havens fell sharply post-FATCA, suggesting that FATCA made significant progress above and beyond the initial wave of enforcement studied by Johannesen et al. [46]. Casi et al. [49] arrive at similar findings in their analysis of the CRS, with an important caveat discussed below. A recent study by Alstadsæter et al. [69] found that the Norwegian crackdown on offshore tax evasion also caused virtually no substitution toward legal avoidance strategies, suggesting that effective crackdowns do indeed raise revenue.

To what extent did taxpayers revise their tax evasion strategies rather than come into compliance? There are three main options available to non-compliers, depending on which specific part of the crackdown we consider. The first option is to change the location of the assets held offshore, from cooperative to non-cooperative havens. Johannesen and Zucman [21] show that this response was widespread after the implementation of G20 EoIR treaties. The broader measures in the second wave of enforcement described above makes this more difficult, although following the CRS, there is evidence of a flight of deposits from ‘classical’ tax havens to the US, who is not providing information to other countries under the CRS [49]. Still, the number of ‘safe’ locations to store offshore assets is declining and could plausibly fall to zero if international cooperation broadens.

The second option is to switch to more sophisticated concealment strategies. The most common way of doing so is to obscure the ownership of the assets using intermediary entities or individuals, with the wealthiest much more likely to use such strategies [47].²⁴ Johannesen [48] shows that the European Savings Directive, introducing a withholding tax on deposits held directly by European taxpayers in 15 participating tax havens, was evaded by some in such a way. Omartian [52] provides evidence that banks had an active role in this process, by facilitating the creation of the new concealment structures.

A third way to avoid reporting assets after the enactment of new transparency policies is to reinvest in alternative assets. In particular, as international enforcement efforts have focused on financial wealth in tax havens, investing in non-financial assets is a way to avoid information disclosure. Bomare and Le Guern Herry [53] show that the announcement of the CRS, which only covers financial assets, led to a large increase in investments out of tax havens into the UK real estate market. This suggests that many sophisticated individuals circumvented the CRS by reallocating their offshore portfolios toward real estate.

Finally, rather than comply or substitute to a different evasive scheme, taxpayers could also choose not to react to new transparency policies. Doing nothing is a rational response if the deterrence effect of the new policies is insufficiently strong, with two factors particularly pertinent here. First, tax enforcement agencies have limited resources to analyze the information they obtain and to audit non-compliant and potentially litigious wealthy taxpayers. Second, information from foreign countries might not always be sufficient to link offshore assets to domestic taxpayers, given the complexity of offshore structures used to hold wealth in tax havens [71, 72]. In other words, third-party information on its own may be insufficient to deter evasion, especially when other components of the enforcement process are starved of resources.

Case Study: Syndicated Conservation Easements

While offshore tax evasion is clearly illegal but difficult to detect, the case of syndicated conservation easements provides an illustrative example of attempts to combat grey-area avoidance. As discussed in Section 2, the root cause of the problem is ambiguity in the valuation of the development rights that landowners forego when entering a conservation easement. The potential for a problem therefore arises due to policies at the very first step of the enforcement process, with the laws that define and regulate the conservation easement tax deduction. In contrast to offshore enforcement, the next steps of enforcement are relatively straightforward: because taxpayers are exploiting a legal grey area, they do not conceal their position and gathering information is relatively straightforward. Policymakers then have two main options to take down syndicated conservation easements: reform the law to shut down abusive schemes, or disallow the abusive tax deductions and litigate the resulting disputes with taxpayers.

So far, the US has taken the disputes and litigation path. The IRS issued a notice identifying syndicated conservation easement transactions as a target of future enforcement activity in 2017 [73]. This notice required that taxpayers disclose their participation in syndicated conservation easements (a first-party reporting rule). They then began auditing taxpayers to attempt to shut down the schemes. Unsurprisingly, taxpayers fought back, and a number of cases wound up in court. The IRS had success in a number of these cases early on, but they came from pointing technical errors made by taxpayers when claiming the deductions, not from disallowing some extreme conservation easements deductions [74].

Despite the ongoing crackdown, the value of claimed syndicated conservation easement deductions actually increased significantly in the following two years, from $6 billion in tax year 2016 to over $9bn in 2018 [75, 76]. Plausibly, the fact that the early cases disallowed a relatively small number of deductions based on technical mistakes rather than deeper valuation questions limited the deterrence effect. The IRS persisted, broadening the scope of its crackdown. In 2019, they scored a major victory in the first case in which they directly contested a valuation and imposed major penalties on the offending taxpayers [77]. This victory was followed by the first conviction for criminal tax fraud against promoters of a syndicated conservation easement scheme in 2020 [78]. However, some taxpayers appear to believe they can avoid the mistakes of those taxpayers who lost their battles with the IRS, and the fight continues. In the years between the initial announcement of the crackdown and the first major victories, the US has lost billions of dollars in tax revenue to these schemes: about $2–3 billion per year based on the total deduction figures above.

Although conservation easements have been a priority for the IRS, they are far from the only type of grey-area avoidance in the US tax system. The IRS’s difficulty in using court battles to deter individuals from claiming conservation easements illustrates the difficulty with using litigation to combat grey-area avoidance in the first place. Legal battles are long and costly, and wealthy taxpayers and their advisors can adjust their initial positions in response to whatever tactics the IRS uses. Targeting the first step of the enforcement process instead would pre-empt the need for these legal battles. Proposals along these lines are currently under consideration in the US Senate following the publication of an investigative report on the issue [79]. Still, delineating abusive and non-abusive conservation easements remains challenging.