A man walks past the United States Capitol on June 25, 2020 in Washington.
El Drago | Reuters
The IRS chief believes more drastic disclosures from the country’s banks could help close a yawning tax gap and claw back billions in unpaid revenue.
In a letter viewed by CNBC, IRS Commissioner Charles Ratig told Senator Elizabeth Warren, D-Mass., That asking banks to provide basic information about their clients’ deposits and withdrawals could make a big dent in annual tax evasion. can.
The IRS chief told Warren on Friday that years of budget cuts have prevented the agency from prosecuting people who do not pay their fair share of federal taxes.
“Every measure essential to effective tax administration has suffered enormous losses,” Ratig wrote, referring to years of budget cuts.
However, President Joe Biden’s U.S. family plan and bipartisan infrastructure deal will result in “significant amounts of new data regarding financial transactions,” a Trump administration conservation note said. “The new data will provide the IRS with a focus on otherwise opaque revenue sources with historically low levels of reporting accuracy.”
In particular, Ratig cited a provision in the U.S. Family Plan that seeks to narrow the tax gap by requiring banks to account for their customers’ withdrawals and deposits, rather than relying on taxpayers. The tax gap is the difference between taxes paid and taxes owed by law.
Ratig noted that for every 1% improvement in tax compliance, annual federal revenues are expected to increase by about $ 30 billion per year. Overall tax compliance – defined as voluntary, accurate, and timely – is estimated by the IRS to be between 82% and 84%.
Senses Bernie Sanders, I-Vt., And Sheldon Whitehouse, DR.I., joined Warren last month and asked the IRS and its commissioners to submit a detailed report on how a better app generated billions in taxes owed to the federal government. can help.
“This new information from the IRS makes it clear that unless you significantly increase IRS funding, the rich can avoid paying their fair share of billions of dollars a year in tax evasion and everyone is a victim. “Warren said of Ratig’s answer sheet. . “That is why the congressional leadership should include significant multi-year funding for the IRS in the budget reconciliation program to strengthen enforcement and generate billions in additional revenue each year.”
The IRS analysis “makes it clear that we need new reporting requirements to improve tax compliance among wealthier Americans and reduce the burden on honest taxpayers,” she said.
At the heart of Rating’s argument is a simple practical problem: not many people like to pay income tax.
This statement is perhaps even more relevant to Americans whose annual income exceeds $ 1 million. These high-income earners are required to remit a higher percentage of their income to the IRS, and therefore have a greater incentive to find ways to bypass the taxpayer.
The banking industry, which would bear the burden of sending more data to the U.S. government, opposed the move in May.
In their spring letter, the American Bankers Association, Bank Policy Institute, Consumer Bankers Association and others argued that “the new reporting requirements for financial institutions would impose unnecessary costs and complexity. by the potential benefits and very uncertain. “
“In addition,” said the trading groups, “we believe that additional reporting requirements guided by subjective criteria have confidentiality and fairness implications and have the potential to place financial institutions in a volatile position with their account holders “.
The collective suggested that financial institutions’ reports are “already strong” and that making more funds available for audits would be a more efficient and fairer approach.
The fact that wealthy earners have access to a variety of methods to hide the true value of their income or more complicated tax returns complicates things for the IRS with budget constraints. For example, a business owner’s tax return is much more complex than that of an employee whose hourly or annual salary can be verified by third-party reports.
Although specific disclosure requirements are ultimately set by the Treasury Department, they may notify the IRS of the size and frequency of deposits and withdrawals from these accounts.
On the bright side, if the tax gap is due to human error – honest or intentional error – more communication between U.S. banks and the IRS could make the problem worse.
Currently, anyone who earns $ 10 or more in interest on an account with a U.S. bank, brokerage firm, or mutual fund is required by law to report that income to the IRS. This document is called a 1099-INT form.
If the banks themselves are required to provide information about their clients’ deposits and withdrawals to the IRS, those clients will be more likely to file their returns correctly. And, if not, the IRS will now be armed with information to prosecute less than honest people.
The assessment indicates that this could be a big win for the tax collector.
“Taxpayers are more likely to be compliant when they know the IRS has the information they need to prosecute them if they don’t meet their tax obligations,” the IRS chief told Warren. “Our research shows that compliance is as low as 45% when income is subject to little or no reporting or withholding tax. When there are enough information reports, compliance reaches over 95%. “
Using banks to crack down on unreported income would only be one step in closing the gap. Knowing how much money is flowing in an account doesn’t necessarily alert the IRS to unreported income. People can receive tax-free gifts or spend on deductible business expenses, which will need to be accounted for by the collector.
Nonetheless, the benefits of moving forward with provisioning may outweigh the hurdles.
This fact is not lost on some of the country’s most prestigious economic authorities. Former Treasury Secretaries Tim Geithner, Jacob Lew, Henry Paulson Jr., Robert Rubin, and Lawrence Summers all defended President Joe Biden’s attempt in a recent New York Times op-ed.
After the White House released the US Family Plan, he wrote in June: “It’s a prudent way to rely on financial institutions to provide basic information about account holders. “With better information for the IRS, voluntary compliance will increase through deterrence, as potential tax evaders will realize that there is a risk of evasion.”
The IRS letter also noted that even the wealthiest taxpayers are most likely to have accounts at international banks that may not provide regular access to U.S. regulators or may not adhere to the same standards.
“Increased technology funding is needed to link foreign properties to their beneficial owners and to detect possible non-compliance,” Ratig wrote. The additional resources will allow the IRS to create “analytical systems that use reporting information to detect unreported income and identify when account holders or foreign financial institutions may engage in non-compliance behavior.” or fraudulent ”. Eh.”
Advocating for additional funding, Ratig reiterated the need to modernize IRS technology, not only to prevent “increasingly sophisticated cybersecurity attacks,” but also to increase agency speed, reduce errors and rely on availability of staff. to allow the operation to continue throughout the day instead of
Years of budget and staffing cuts have left the IRS with about 74,000 full-time employees, a rate not seen since 1973. But the challenges the agency faces, especially in the past 16 months, have failed. have only increased, Ratig said.
There is probably no better way to document a request for IRS services than by the number of customer service phone calls. In 2021 alone, the IRS received more than 199 million calls, almost 400% more than what the agency receives in the average calendar year.
The agency answered nearly 50 million calls between live “assistants” and automated providers. According to Rettig’s letter, the IRS received 42 million calls in 2018, 40 million calls in 2019, and 55 million calls in 2020.
All in all, such improvements can generate hundreds of billions in windfall revenue over time.
The Treasury Department’s own analysis shows that efforts to close the tax gap will generate $ 700 billion in additional tax revenue in the first 10 years of budget relief and an additional $ 1.6 trillion in the second decade .