Loyola University Chicago School of Law, JD 2022
In May of 2021, the United States Department of Treasury (“Treasury”) introduced its revenue proposals for the 2022 fiscal year. One of the proposals that garnered significant attention was the Comprehensive Financial Account Reporting to Improve Tax Compliance; under this proposal, financial institutions will be required to report to the Treasury the total amount of inflow and outflow on bank, loan, and investment accounts for accounts that hold at least $600 a year. Since its introduction and after serious political push-back, this amount has since been increased to accounts that hold at least $10,000 a year.
If the reporting requirement is implemented, the Biden Administration proposes to raise the Internal Revenue Service (“IRS”) funding by $80 billion to finance the cost of additional auditors and equipment. However, the Biden Administration, with the proposal’s implementation, expects a payoff of $460 billion over ten years in additional revenue. Although this proposal is intended at limiting wealth tax evasion, this proposal misses the mark. Specifically, it does not adequately address businesses that are able to cheat tax codes by stretching the current law, and instead scrutinizes small businesses and individuals while it exponentially increases the personal data held by the Treasury.
Reasons cited for the proposal
The Treasury’s “Green Book,” the Department’s supplement to its proposals, explains that there is a need for this proposal, where the IRS estimates that there is a tax gap of $166 billion a year for business income. Meaning that $166 billion per year is legally owed but goes unpaid. Further, according to the Treasury, the bottom fifty percent of taxpayers are responsible for just eight percent of unpaid taxes on unreported income, while the top one percent owes twenty-eight percent.
Biden’s proposal is aimed at reducing that large tax gap. Under this proposal, as stated above, financial institutions will be required to report their comprehensive annual total inflow and outflow information, so that the IRS has increased visibility of gross receipts and deductive expenses. This will allow the Treasury to create an algorithm to trigger audits, where the IRS will be able to scrutinize business and other financial records. In line with the proposal’s intentions, the IRS stated that this will help it identify individuals who underreport their income and who underpay their tax obligations.
As it stands, perception of this proposal seem to be tied to party lines, where generally, Democrats are in favor of the proposal and Republicans are against the proposal.
Several Senate Democrats have publicly voiced support for this proposal. Senator Elizabeth Warren told reporters that “third party reporting would help the IRS zero in on tax cheats when the wealthy don’t honestly report their income.” Further, Steve Wamhoff, a director with the Institute for Taxation and Economic Policy, commented that this proposal does not add any new or additional taxes, but instead it merely gives the IRS an ability to enforce the tax laws that are already in place. Democrats maintain that this proposal confronts inequities in the tax system, where the United States tax system is set up so higher-earning individuals can use loophole taxes to low-ball or not report private business income. Democrats urge that this proposal may even the playing field and address those inequities. However, not all Democratsare in agreement. Many Senate Democrats have not voiced outright approval of this plan, and instead some voiced disapproval while others stated that they will need a more formal draft of the proposal to make any decision.
Many Senate Republicans, including Mitch McConnell, expressed concerns that the amount of information that would be available to the IRS is too expansive and gives the IRS “new snooping powers.” Additionally, institutions, such as the American Bankers Associations (ABA), continued to expand on Republicans’ concerns when it stated that the amount of information that was created and stored would cause concerns over individual data security and privacy. Additionally, ABA Vice President John Kinsella went on to express that there was a disconnect between the proposal’s narrow purpose and its wide and deep reach. Although the merits of the government snooping argument and tracking argument are subject to debate, most Republicans maintain that this is a government overreach.
Although the intentions of the proposal are clear, experts, such as Steven Rosenthal with the Tax Policy Center, warn that the proposed changes may have considerable consequences, such as catching small businesses, but likely missing big businesses and higher-earning individuals that cheat by stretching the tax law, not by hiding their cash flow.
Under this proposal, high-cash businesses, like small restaurants, laundromats and grocery stores, will be placed under heightened scrutiny because their cash inflows and outflows will likely trigger the IRS’s algorithm and subsequent auditing. Further, under this proposal, undeclared income earned by workers who are typically “paid under the table” such as nannies, repair workers, street vendors, and day laborers, will likewise be subject to heightened scrutiny. As journalist Leandra Bernstein stated, although it is illegal to conceal income from the IRS, the above-mentioned businesses and individuals are hardly the targets the Biden administration described. The consequences of this proposal are significant, and this proposal does not adequately address those consequences.
The Uncertain Future of this Proposal
Simply put, most tax legislation recommendations are proposed by the president, where these proposals are based on recommendations from the Treasury. After a presidential recommendation, the House of Representatives will revise the proposal and turn it into a draft legislation. Once the proposal is drafted, the House of Representatives will vote and if it passes a simple majority, it will be introduced to the Senate and its committees. If the Senate passes the bill, it will be sent directly to the president for signature and once it is signed, the Executive Branch will carry out the provisions of the bill.
Although this proposal has a long way before it may be turned into law, Congress needs to be aware of the potential ramifications. As it currently stands, this proposal does not target the high-income businesses and individuals that it is meant to target. This proposal should not be passed without considerable adjustments and further evaluation of its consequences.