The plan would require banks to report to the Internal Revenue Service their annual account inflows and outflows.
A portion of President Biden’s $1.8 trillion American Families Plan is contingent on banks adhering to stricter reporting requirements designed to detect unreported profits.
The plan would require banks to report to the Internal Revenue Service their annual account inflows and outflows. According to people familiar with the proposal, the provision would also apply to peer-to-peer payment systems such as Venmo but would not require individuals or companies to provide additional information to the government. Financial companies are already required to disclose interest, dividend, and investment income, and the IRS has the ability to obtain bank records during audits.
“Providing this information to the IRS would assist it in improving audit selection, allowing it to focus its compliance efforts on the most suspect tax evaders while preventing unnecessary (and costly) audits of ordinary taxpayers,” the Treasury Department said in a statement Wednesday.
The Biden proposal, which includes increased spending on child care, education, and paid leave, is based on a $700 billion revenue stream that the administration claims would result from a major expansion of the Internal Revenue Service. The extension of information reporting under the programme, when combined with other efforts, would result in approximately $460 billion of the $700 billion in increased tax collection under the Biden IRS reforms, according to the people.
The proposal will primarily impact business owners’ bank accounts, putting financial institutions at the forefront of efforts to reduce unreported or misreported business profits. According to the IRS, up to 55% of company revenue is unreported or misreported.
The plan is likely to face opposition from the banking sector, which has previously expressed concern about the costs associated with increased enforcement requirements. The degree of resistance will depend on how resource-intensive compliance will prove to be for banks, according to Dan Stipano, a former senior attorney at the Office of the Comptroller of the Currency.
“If they already grab it, it might not be such a big deal,” Mr. Stipano said. “However, if not, I can see it greatly increasing their already substantial enforcement costs and burdens.”
For years, former IRS officials and progressive advocates have proposed using bank account details to close the tax gap—the IRS’s calculation of taxes due but not paid. According to former IRS Commissioner Charles Rossotti, who has lobbied for a variant of the initiative, and others, the deficit will approach $600 billion by 2020.
“It makes more sense to collect taxes that are already due before increasing them on those that are already paying,” Mr. Rossotti said.
Nonetheless, requiring banks to exchange data on consumer accounts, which would require congressional approval, would be a first step toward closing the gap. Knowing how much money enters and leaves an account does not tell the IRS whether unreported income exists. Individuals may accept nontaxable gifts or subtract business expenses, for example.
The IRS will need to devise a method for using the data to determine the business owners to audit and what questions to pose. Additionally, billions of dollars will be spent on technology and staffing to allow the IRS to digest and analyze the data.
“The jury is still out on whether the IRS has the capacity to do this properly,” said Nina Olson, a former IRS watchdog who worked in-house from 2001 to 2019.
Even if the IRS is unable to use the information effectively, the move can have an impact on tax enforcement. That is because taxpayers may become less aggressive in their tax affairs once they realize the IRS has a more complete picture of their bank transactions.