4 facts that refute opponents’ claims about Biden’s tax compliance proposal
The United States loses about $ 600 billion in unpaid taxes each year, with the richest 1% responsible for about $ 163 billion. One of the main ways President Joe Biden has proposed to fund his Build Back Better plan is to solve this problem with a new plan that would force tax evaders to pay what they owe.
President Biden’s tax compliance initiative has two main components: 1) funding to rebuild the IRS’s ability to audit high net worth individuals and businesses and modernize its IT systems, and 2) expand information reporting tax by financial institutions. The banking industry is lobbying aggressively against the latter, even though it is critical to improving the IRS’s ability to detect tax fraud, and industrial and conservative opponents are twisting the proposal to stoke fears. This column addresses some of the misleading claims and sets the record straight with the following four facts.
1. Status quo allows high-income business owners to evade billions in taxes while workers pay taxes with every paycheque
The current tax system is unfair to workers, the business owners who pay what they owe and other honest taxpayers. Improved bank reporting is needed to remedy this, as tax compliance is highly dependent on whether or not there are third party reports of information. Currently, there are no third-party reports for some forms of income disproportionately earned by high-income Americans, such as business income – and, as a result, compliance rates are woefully low. . Meanwhile, regular workers report virtually all of their wages on their tax returns because their employers send them and the government W-2 forms at the end of each year. Taxes are also levied directly on workers’ paychecks.
The bank statement proposal gives the IRS better visibility into opaque forms of income. Currently, banks and other financial institutions are required to issue 1099-INT forms for customers who receive $ 10 or more in interest. The proposal would require financial institutions to also report two additional pieces of information on the 1099-INT for certain accounts: the total of annual entries into the accounts and the total of annual outflows.
The Biden administration’s initial proposal would have exempted accounts with less than $ 600 in or out, but the administration worked with Senate Finance Committee Chairman Ron Wyden (D-OR) to change the proposal in a way that greatly reduces the number of accounts for which report is required. The updated proposal would not require reporting for accounts that have less than $ 10,000 in inflows or outflows. More importantly, paychecks and government payments such as Social Security – and the amount of outflows equivalent to those paychecks and payments received – would not count towards the $ 10,000, exempting most Americans. whose income is already reported annually on other IRS forms and targeting the proposal toward more opaque income forms.
With basic information about account flows, the IRS will be able to select audits more effectively, meaning people who cheat are more likely to get caught, while regular and honest taxpayers will be faced with fewer unnecessary audits. And that will deter cheating by making it riskier and more difficult. As five former bipartisan treasury secretaries recently wrote in a New York Times op-ed: “With better information for the IRS, voluntary compliance will increase through deterrence as potential tax evaders realize there is a risk of evasion.”
2. The IRS will not receive any transaction level information as part of the proposal.
The most common misleading claim made about the proposal is that it allows the IRS to “watch” or “snoop” on people’s bank accounts. The suggestion – sometimes implicit, sometimes explicit – is that IRS agents will be able to see transaction information, such as what a person is spending money on and where they are spending it. This far-fetched claim from Senate Minority Leader Mitch McConnell (R-KY) is typical:
President Biden’s new plan creates a massive new sweep that would wipe out all sorts of ordinary transactions that normal, law-abiding Americans do on a regular basis. … The IRS already knows how much you earn. Now they want to know exactly how you are spending it. Is your monthly rent or mortgage payment over $ 600? If the Democrats in Washington get what they want, the government will be notified. Do you have your eye on a new rifle and equipment before the next hunting season? The IRS would hear.
On a related note, Consumer Bankers Association president Richard Hunt said the IRS “will slice and analyze every transaction of almost all Americans.”
These descriptions are simply wrong – they have been widely demystified. The proposal does not give the IRS any information at the transaction level. Banks would only report total inflows into accounts and total outflows from accounts for the previous year. The IRS would have no ability to see how the money is spent or any other type of transaction level information. (And if the banking industry is truly concerned about customer privacy, it should look at its own practice of selling transaction data.)
3. Under the Biden proposal, ordinary taxpayers will be less likely to be audited
Critics of the Biden proposal also reverse it, saying it will increase the compliance and audit burdens on ordinary Americans. Senator Tommy Tuberville (R-AL), for example, said:
The proposal would dramatically increase IRS audits of American workers. The overwhelming majority of people the IRS would review as a result of this policy would have done nothing wrong, but when the IRS starts snooping around it will cost you a lot of money. That means hiring a high priced lawyer / accountant who will bleed you dry.
Tuberville’s claims are completely false. The bank statement proposal will reduce audits of honest and ordinary taxpayers. Instead, the administration’s comprehensive tax enforcement initiative shifts IRS enforcement resources to wealthy individuals and large corporations, whose audit rates have fallen the most in recent years. Under Biden’s plan and the House Build Back Better bill, overall audit rates will not increase for people earning less than $ 400,000.
In addition, with a greater ability to detect suspicious activity, the IRS will be able to target audits more effectively. This means more productive tax fraud audits and fewer unnecessary audits of compliant taxpayers. The bottom line: If you earn less than $ 400,000 and don’t cheat on your taxes, President Biden’s proposal makes it less likely that you will be audited and have to provide the detailed financial information that audits may require.
As Treasury Secretary Janet Yellen recently wrote to Congress: “For taxpayers already in compliance, the only effect [of the proposal] is a distinct advantage: a reduced likelihood of costly and time-consuming audits. “
4. Account flow information will be critical for the IRS to spot hidden revenue streams.
The banking industry is also mistakenly arguing that improved reporting will not help the IRS stop tax evasion. But the Biden plan is anchored in a proposal made by two former IRS commissioners and a former IRS associate commissioner for business systems modernization: Charles Rossotti, Fred Goldberg and Fred Forman. They explained why basic bank flow information is essential:
[The IRS] lack of information on some sources of income, such as most business income earned by individuals and intermediary businesses such as partnerships. It’s like a hole in a big bucket – water will find the hole.
The solution we and the administration have proposed will leverage information and technology to increase voluntary compliance and make the enforcement process more efficient.
By adding third-party reports that can help identify underreported income, more income will move from the low visibility category to higher visibility. This is what the additional report proposed by the administration on the financial accounts will do. Much like plugging the existing hole in the bucket, this additional information will increase voluntary compliance and help identify gaps.
The IRS technology upgrade will also allow the agency to make full use of all of its information to increase the effectiveness and efficiency of all IRS enforcement activities when deficiencies are detected.
The combination of these elements builds on what works today: providing taxpayers and the IRS with the same information for greater accuracy in tax preparation, and providing the IRS with the technology to verify the tax returns. declarations efficiently and resolve cases quickly and fairly.
It is important to emphasize that the bank declaration proposal does not increase taxes on anyone; it only reforms the tax information reporting system to help catch tax evaders. Collecting taxes already owed is just a smart way to pay for essential investments in the Build Back Better Act.
Seth Hanlon is a senior fellow at the Center for American Progress.