The IRS would get access to more data to improve how it selects potential tax evaders for audit under President Joe Biden’s plan to impose a new reporting requirement on financial institutions, such as banks.
Biden’s American Families Plan would require banks and other financial institutions to add information on aggregate account outflows and inflows to their annual reports to the IRS, the Treasury Department said in a news release Wednesday outlining the tax compliance components of the plan. The department said the extra information would “help improve audit selection so it can better target its enforcement activity on the most suspect evaders, avoiding unnecessary (and costly) audits of ordinary taxpayers.”
Former IRS Commissioners Fred Goldberg and Charles Rossotti previously put forth a similar proposal that would require banks to provide an annual summary of deposits and withdrawals to the top earning 25% of taxpayers with business income.
More reporting would allow the IRS to pinpoint tax avoidance by locating discrepancies between what banks are disclosing and what income is being included on tax returns. It would also likely prompt more people to voluntarily comply with the tax code. Together those changes could help close the tax gap that the IRS has said may exceed more than $1 trillion per year. The tax gap is the difference between what taxpayers owe and what they actually pay on time.
Rossotti told Bloomberg Tax Wednesday that he and Goldberg have been advising the administration on the tax administration reforms in the plan, including possible information reporting changes. A Treasury spokesperson confirmed the former commissioners were among the many tax compliance experts that the administration consulted.
The proposal is part of a broader plan to hike taxes on the wealthy to fund investments in childcare and education. The administration is counting on a bigger IRS budget significantly increasing enforcement revenue to help pay for the changes.
The reporting requirement would help the IRS gain visibility into the partnership and proprietorship income of high earners, where as much as 55% of taxes owed go unpaid, Treasury said.
Any additional reporting information from banks to the IRS would increase compliance costs and add to the burden banks already have in handing information over to the government, said Paul Merski, executive vice president of congressional relations at Independent Community Bankers of America.
Banks already report millions of transactions a day to the Financial Crimes Enforcement Network in the form of currency transaction reports, in addition to suspicious activity reports, which are required when potential illicit activity is detected by a bank. Banks are required to submit currency transaction reports when a deposit or withdrawal is $10,000 or more, a threshold that’s already very low, Merski said.
Merski said the proposal, as written, is akin to “sending your bank statement to the IRS every month,” which would be opposed by the banking industry because of the reporting burdens already required by federal regulators.
“The federal government can’t track all of that—any more requirements would be adding more hay to that haystack,” he said.
Poor Tax Compliance
Tax compliance can be as low as 50% in areas where no information reporting is required, as is the case with much business income, according to Rossotti, now a senior adviser with Carlyle Investment Management LLC in Washington. Filling in that gap could increase that number to more than 90%, he said.
But more information reporting on its own won’t fix the problem, he said. IRS funding also has to increase over a prolonged period of time so that the agency can hire more staff and upgrade its technology to make better use of new and existing data.
The Biden administration plans to invest $80 billion in the IRS over a 10-year period to fund technology upgrades, hiring, and training for complex audits, Treasury said.
The increased investment in the agency would generate $700 billion in revenue over 10 years, according to an outline of the American Families Plan. Rossotti predicts these types of changes could bring in double that over a 10-year timeframe.
“If the basic outline is passed, this will be the biggest win for compliant taxpayers in half a century at least,” he said.
—With assistance from Laura Davison.