IRS Commissioner Charles Rettig sadly told Congress in April of this year that the estimated tax gap – that is, the difference between taxes owed and owed by U.S. taxpayers each year and taxes actually declared as due and collected – could reach $ 1 trillion each. year. According to Senator Ron Wyden D-Ore, “the cheating of those at the top” is the main reason for this incredibly large tax gap. How do those “at the top” manage to cope? Because the IRS is “completely overwhelmed” and the wealthiest taxpayers are able to hide their income using opaque income structures and hide their income through partnerships and other complicated structures, says Wyden . To address this issue, the Biden administration and Senators Wyden and Elizabeth Warren D-Mass are proposing to require banks to report the total amount deposited and the total amount withdrawn to a domestic bank account in a year.
How would the plan work?
The proposal is significantly reduced compared to the original plan, which provided for direct reporting of the total amount of funds deposited and withdrawn from national bank accounts for all amounts over $ 600. The new version of the bank reporting plan, according to a Treasury Department fact sheet, would exclude federal program employees and beneficiaries, such as Social Security beneficiaries, from automatic reporting and only require reporting. over $ 10,000.
Senator Wyden said today that for employees who do not have a $ 10,000 surplus in their bank account, there would be no additional reporting. He rightly pointed out that banks are already required to provide information to the IRS, report any interest over $ 10 earned to the IRS, and provide a copy of that same form to taxpayers. As a result, he argued, adding account entries and withdrawal totals for a year should not create an excessive administrative burden for banks.
Benefits of the scheme
Senator Warren referred on Tuesday to testimony from Assistant Secretary of the Treasury Wally Adeymo, who estimated that the richest 1% of taxpayers will pay no more than the $ 2 trillion in taxes they owe over the 10 coming years, claiming that the proposed plan will make a positive impact on reducing the tax gap. As an attorney specializing in tax controversies and litigation, I can guarantee that if banks are required to report total inflows and withdrawals of more than $ 10,000, there will be two significant positive impacts on the tax gap:
- Deterrent – Individuals and business owners who would otherwise be tempted to under-report their income simply won’t. Taxpayers who know the IRS will see exactly how much has been deposited into a bank account are much less likely to lie about total gross receipts. This is the best possible outcome because it costs the bank money to comply with the reporting requirement, but does not cost taxpayers a dime more in IRS enforcement. The reporting requirement alone would deter tax evasion.
- Execution – Taxpayers who for whatever reason do not receive the note that the IRS will receive the total inflows and withdrawals will still underreport their income, but it will be much easier for the IRS to identify them. The IRS already regularly reviews taxpayers and adjusts reported income based on the amount of deposits in a bank account relative to gross revenue or income actually reported on a tax return. But the IRS must issue a briefing request, or summons, to get the bank account information. By requiring banks to affirmatively report this information to the IRS, Congress would help the IRS create an inexpensive way to identify taxpayers who should be screened for review.
Problems with the proposal
While Senator Wyden asserted that Democrats have worked to address the scenario where taxpayers have saved up for a major purchase, such as a house, by exempting from the reporting requirement anyone who does not receive more than $ 10,000 in addition to the W-2 salary, neither the fact sheet nor the explanations given on Tuesday address this problem in practice.
Furthermore, while the underreporting of income, such as gross receipts, would be reduced through an information reporting regime that would require banks to report inflows and withdrawals, this will in no way eliminate the tax gap or the sophisticated means by which many of the richest Americans seek to reduce or eliminate their taxes. Thus, while it is true that this proposal would have a positive impact on the tax gap, we do not know to what extent.
Put it all together
Imagine that John and Suzy, both salaried employees, save for their dream house and put funds into the “dream house” account. When they’re ready to put down a down payment, they transfer the $ 60,000 they’ve saved over the past two years in salaries and gifts, vacations, and so on. on their common current account. Under the current proposal, as explained on Tuesday, the contribution of $ 60,000 would trigger the disclosure of information by the bank. Now, it’s also possible that John and Suzy saved up for their house by crushing money on Suzy’s job, or maybe John is accepting bribes, and the news report would alert the IRS of an actual underreporting of income. It is worth considering whether, as taxpayers, we would prefer to have a “checkbox” choice, alerting the IRS of a “major purchase”, undergoing an IRS review which would likely be resolved quickly. by informing a reviewer of the savings for the major purchase. , or allow taxpayers like John and Suzy to cheat if they actually steal, to protect individual privacy.
The point is, John and Suzy who are diligently – and legitimately – saving for a new home are out there and have real privacy issues. But the Johns and Suzy who skim and pay no taxes are also there. And for every dollar they don’t pay, it costs the rest of America’s taxpayers. Our tax system is based on voluntary compliance and the idea that everyone should pay their fair share. When tax evaders get away with it, it erodes everyone’s confidence in the system.