The IRS would require banks to report gross flows of money in and out of some taxpayers’ bank accounts.
The Internal Revenue Service (IRS) could be missing out on collecting approximately $1 trillion every year from taxpayers who are not paying their full tab, Charles Rettig, the IRS commissioner said during a Congressional hearing.
To effectively collect taxes, IRS has to know about the financial transactions before it can assess appropriate federal taxes. In recent years, the agency has been stepping up enforcement and IRS researchers looked into tax evasion and pointed a finger at the wealthiest taxpayers.
The new bank reporting proposal that was once considered by Congress would take a step at addressing this tax evasion concern. It would only apply to bank and financial institution accounts with more than $10,000 of annual cash flows. And the biggest sources of income for most Americans—paycheck deposits and government payments such as Social Security—would not count toward that $10,000, according to MarketWatch.
It is also intended to strengthen the IRS’s enforcement arm to catch tax cheats and evaders, which is illegal. The bank reporting proposal is designed to improve the IRS’s ability to select who to audit, so that it does more audits of tax cheats—especially wealthier tax cheats—and fewer audits of wage earners who pay what they owe.
Currently, the IRS is able to easily enforce tax laws involving workers’ wage income, but enforcement is patchy or nonexistent when it comes to forms of income that flow disproportionately to high-income Americans—especially income from businesses and other income producing assets.
Employers are required to file a W-2 form reporting employees’ annual wages—and as a result of that and paycheck withholding, 99% of wages are properly reported to the IRS.
But there is little or no third-party reporting of types of income that flow disproportionately to wealthy workers and businesses, and as a result, hundreds of billions of dollars goes unreported every year.
The Treasury Department estimates the overall amount of unpaid taxes to be $600 billion a year, with the richest 1% responsible for more than $150 billion of that.
By building on the existing system of bank information reporting, it should become more difficult for wealthy individuals to hide income. Currently, banks and other financial institutions are required to issue Form 1099-INTs to customers receiving $10 or more of interest a year. This proposal would require banks to report two additional pieces of information for some personal and business accounts—the total amount of money that has flowed in for the prior year, and the total amount of money that has flowed out, rounded to the nearest $1,000.
The proposal would only apply to personal and business accounts with more than $10,000 of cash flows. And the biggest sources of income for most Americans—paycheck deposits and government payments such as Social Security—would not count toward that $10,000. So most Americans’ bank accounts wouldn’t be included.
This proposal would have no effect whatsoever on people’s tax liability. Nobody—not even the wealthiest Americans, who would pay more or would owe extra taxes because of enhanced bank reporting.
Rob Nichols, president and CEO of American Bankers Association, was unconvinced. “Even with the modifications…, this proposal still goes too far by forcing financial institutions to share with the IRS private financial data from millions of customers not suspected of cheating on their taxes,” he said in Barron’s.
The proposal will still raise “privacy concerns, increase tax-preparation costs for individuals and small businesses, and create significant operational challenges, particularly for community banks,” he said.
What bank reporting would do is give the IRS the ability to detect possible indications of tax evasion in instances where an individual or business partnership has millions of dollars flowing into a bank account but does not file a tax return or reports minimal gross receipts. That type of information would help the IRS select audits more efficiently and deter tax cheating and evasion.
“Today’s new [bank reporting] proposal reflects the administration’s strong belief that we should zero in on those at the top of the income scale who don’t pay the taxes they owe, while protecting American workers by setting the bank-account threshold at $10,000 and providing an exemption for wage earners like teachers and firefighters,” Treasury Secretary Janet Yellen said in a statement.
References:
- https://www.marketwatch.com/story/most-taxpayers-would-be-less-likely-to-be-audited-under-bidens-new-irs-enforcement-proposal-11634854551
- https://www.marketwatch.com/story/tax-cheats-cost-the-u-s-far-more-than-previously-thought-and-cryptocurrency-is-part-of-the-problem-irs-commissioner-says-11618340252
- https://www.barrons.com/articles/biden-irs-taxes-banks-51634737549