More data from banks can combat tax evasion

The IRS chief believes the more stringent disclosures of the nation’s banks could help fix a fiscal shortfall and recover billions in due revenue.

In a letter seen by CNBC, IRS Commissioner Charles Rettig told Sen. Elizabeth Warren, D-Mass., That they rely on banks to report basic information about their customers’ deposits and withdrawals. it could cause great damage in annual tax evasion.

A source provided CNBC with access to the letter, which is expected to be published Thursday. The source revealed its contents on condition of anonymity.

The IRS chief told Warren in Friday’s letter that years of budget cuts have left the agency unable to prosecute those who do not pay their fair share of federal taxes.

“All important measures for effective tax administration have suffered enormously,” Rettig wrote, referring to years of budget cuts.

However, President Joe Biden’s American family plan and the bipartisan infrastructure agreement “would result in significant volumes of new data on financial transactions,” said Rettig, a Trump administrator. “The new data will provide the IRS with a lens toward otherwise opaque sources of revenue with historically lower levels of report accuracy.”

Specifically, Rettig promoted a provision in the American Families Plan that seeks to reduce the tax gap by requiring banks to report withdrawals and deposits from their customers rather than relying on taxpayers themselves. The tax gap is the difference between taxes paid and taxes owed by law.

Rettig noted that for every 1% improvement in tax compliance, federal annual revenue is projected to increase by about $ 30 billion annually. The IRS estimates that overall tax compliance, defined as voluntary, accurate and timely, will fall between 82% and 84%.

Mr. Bernie Sanders, I-Vt., And Sheldon Whitehouse, DR., Joined Warren last month to request that the IRS and its commissioner provide a detailed report on how a better application could help generate billions for the federal government in taxes due. .

“This new information from the IRS makes it clear that unless we significantly increase IRS funding, wealthy tax evaders and large corporations will be able to continue to pay their fair share for a billion dollars a year while everyone in suffer, ”Warren explains. said of Rettig’s reply letter. “That’s why Congress leadership needs to include in the budget reconciliation package significant multi-year funding for the IRS to increase implementation and get billions more revenue each year.”

The IRS analysis “makes it clear that we need new reporting requirements in order to improve tax compliance among wealthier Americans and reduce the burden for honest taxpayers,” he added.

Rettig’s main argument is a simple behavioral problem: few people like to pay income taxes.

This statement is likely to be even more relevant for Americans with annual incomes in excess of $ 1 million. These high-income employees have to pay a larger percentage of their income to the IRS and therefore have a greater incentive to find ways to sideline the taxpayer.

The banking industry, which would take on the burden of sending more data to the U.S. government, protested the provision in May.

In their spring letter, the American Bankers Association, the Bank Policy Institute, the Consumer Bankers Association, and others argued that “new information requirements for financial institutions would impose costs and complexity that are not justified by potential benefits. and highly uncertain. “

“In addition,” the trading groups added, “we believe that additional reporting requirements guided by subjective criteria have implications for privacy and equity and the potential to place financial institutions in an unsustainable position with their holders. accounts “.

The collective suggested that reporting from financial institutions “is already robust” and that providing more funding for audits would be a more efficient and fair approach.

The fact that wealthy employees tend to have access to various ways to obscure the true value of their income or file more complicated tax returns is tricky for the IRS with budgets. An employer’s tax return, for example, is much more complicated than an employee’s hourly wage or annual salary can be verified through third-party reports.

While, ultimately, specific disclosure requirements would be ruled out by the Treasury Department, they could inform the IRS of the size and frequency of deposits and withdrawals from these accounts.

On the upside, if the tax gap is caused by human error (honest or intentional error), more thorough communication between U.S. banks and the IRS could alleviate the problem.

At this time, anyone who earns interest of $ 10 or more on an account with a bank, brokerage firm, or mutual fund in the United States is required by law to report those gains to the IRS. This document is called Form 1099-INT.

If banks themselves are required to provide the IRS with information about their customers’ deposits and withdrawals, it is likely that those customers will complete the statements accurately. And if not, the IRS would now be armed with information to prosecute those less honest.

That, Rettig says, could mean a big win for the tax collector.

“Taxpayers are more likely to meet the requirements when they know the IRS has the information to prosecute them in case they fail to meet their tax obligations,” the IRS chief told Warren. “Our research shows that compliance is as low as 45 percent when revenue is subject to little or no tax information or withholding tax. When there are substantial information reports, compliance increases above the 95 percent. “

Using banks to curb undeclared income would likely represent just one step in bridging the gap. Just knowing how much money flows through an account doesn’t necessarily alert the IRS of undeclared income. People can receive non-taxable gifts or spend on deductible business expenses, which the tax collector should consider.

However, the benefits of moving forward with the provision could offset the obstacles.

This fact is not lost on some of the most prestigious economic authorities in the country. Former Treasury Secretaries Tim Geithner, Jacob Lew, Henry Paulson Jr., Robert Rubin, and Lawrence Summers defended President Joe Biden’s effort in a recent New York Times publication.

“Relying on financial institutions to pass on basic information about account holders is a sensible way to go,” they wrote in June, after the White House released the American Families Plan. “With better information for the IRS, voluntary compliance will increase through deterrence as potential tax evaders realize there is a risk of evasion.”

The IRS letter also noted that wealthier taxpayers are also the most likely to have accounts in international banks that may not offer U.S. regulators regular access or meet the same standards.

“Increasing technology financing is essential to linking foreign-owned assets to their effective owners and detecting possible defaults,” Rettig wrote. The added resources will allow the IRS to build “analytical systems that use information reporting to detect undeclared income and identify when foreign account holders or financial institutions may engage in non-compliant or fraudulent behavior.”

In advocating for additional funding, Rettig reiterated the need to modernize IRS technology not only to advocate for “increasingly sophisticated cybersecurity attacks,” but to increase the agency’s speed, reduce errors, and allow operations to continue. day instead of relying on staff availability.

The years of budget and staff cuts have left the IRS with nearly 74,000 full-time employees, a level not seen since 1973. But the challenges the agency faces, especially in the past 16 months, only they have grown, Rettig said.

There may not be a better way to document IRS service demand than the number of customer service phone calls. In 2021 alone, the IRS has received more than 199 million calls, about 400% more than the agency receives in an average calendar year.

The agency has answered about 50 million of these 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.

In total, these corrections could eventually generate hundreds of billions in revenue due.

The Treasury Department’s analysis shows that efforts to reduce the fiscal gap will generate $ 700 billion in additional tax revenue during the first ten years of budget relief and an additional $ 1.6 trillion over the second decade.