4 Facts That Disprove Opponents’ Claims About Biden’s Tax Compliance Proposal
The United States loses roughly $600 billion in unpaid taxes every year, with the richest 1 percent responsible for an estimated $163 billion. One of the main ways that President Joe Biden proposes to pay for his Build Back Better plan is to address this issue with a new plan that would make tax cheats pay what they owe.
Amount in unpaid taxes the United States loses every year
Amount in unpaid taxes owed by the richest 1 percent every year
President Biden’s tax compliance initiative has two main components: 1) funding to rebuild the IRS’ capacity to audit wealthy individuals and corporations and modernize its computer systems and 2) expanded tax information reporting by financial institutions. The banking industry is aggressively lobbying against the latter component—even though it is critical for improving the IRS’ ability to spot tax cheats—and industry and conservative opponents are misrepresenting the proposal to stoke fears. This column addresses some of the misleading claims and sets the record straight with the following four facts.
The Forbes 400 Pay Lower Tax Rates Than Many Ordinary Americans
1. The status quo allows high-income business owners to evade billions in taxes while workers pay taxes with every paycheck
The current tax system is unfair to workers, to business owners who pay what they owe, and to other honest taxpayers. Enhanced bank reporting is needed to remedy this because tax compliance depends heavily on whether there is third-party information reporting. Currently, there is no third-party reporting for certain forms of income disproportionately earned by high-income Americans, such as business income—and, as a result, compliance rates are dismally low. Meanwhile, regular workers report virtually all their wages on their tax returns because their employers send W-2 forms to them and to the government at the end of each year. Taxes are also directly withheld from workers’ paychecks.
The bank reporting proposal gives the IRS better visibility into opaque forms of income. Currently, banks and other financial institutions are required to issue Form 1099-INTs for customers who receive $10 or more of interest. The proposal would require financial institutions also to report two additional pieces of information on 1099-INTs for some accounts: total annual inflows into accounts and total annual outflows.
The Biden administration’s original proposal would have exempted accounts with less than $600 of inflows or outflows, but the administration has worked with Senate Finance Committee Chair Ron Wyden (D-OR) to amend the proposal in a way that vastly reduces the number of accounts for which reporting is required. The updated proposal would not require reporting for accounts that have less than $10,000 of inflows or outflows. More significantly, paychecks and government payments such as Social Security—and the amount of outflows equivalent to those paychecks and payments received—would not count toward the $10,000, exempting most Americans whose income is already reported annually on other IRS forms and targeting the proposal toward more opaque forms of income.
With basic information on account flows, the IRS will be able to select audits more efficiently—which means that people who are cheating are more likely to get caught, while ordinary, honest taxpayers will face fewer unnecessary audits. And it will deter cheating by making it riskier and more difficult. As five bipartisan former secretaries of the treasury wrote recently in a New York Times op-ed: “With better information for the I.R.S., voluntary compliance will rise through deterrence as potential tax evaders realize there is a risk to evasion.”
2. The IRS will not receive any transaction-level information under the proposal
The most frequently made misleading claim about the proposal is that it lets the IRS “monitor” or “snoop” into people’s bank accounts. The suggestion—sometimes implicit, sometimes explicit—is that IRS agents will be able to see information on transactions, such as what a person spends money on and where they are spending it. This outlandish claim made by Senate Minority Leader Mitch McConnell (R-KY) is typical:
President Biden’s new plan creates a massive new dragnet that would sweep up all kinds of ordinary transactions that normal, law-abiding Americans make routinely. … The IRS already knows how much you earn. Now they want to know exactly how you spend it. Is your monthly rent or mortgage payment more than $600? If Washington Democrats get their way, the government would get to know about it. Have your eye on a new rifle and equipment ahead of next hunting season? The IRS would hear.
Along similar lines, Consumer Bankers Association President Richard Hunt claimed that the IRS is “going to slice and dice and look into every single transaction of almost nearly every American.”
These descriptions are simply false—they have been extensively debunked. The proposal gives the IRS no transaction-level information at all. Banks would report only total inflows into accounts and total outflows from accounts for the preceding year. The IRS would have no ability to see how money is being spent or any other kind of transaction-level information. (And if the banking industry is truly concerned about customer privacy, it should examine its own practice of selling data about transactions.)
3. Under the Biden proposal, ordinary taxpayers will be less likely to be audited
Critics of the Biden proposal are also turning it on its head by claiming that it will increase compliance burdens and audits of ordinary Americans. Sen. Tommy Tuberville (R-AL), for example, said:
The proposal would dramatically increase IRS audits of working Americans. The overwhelming majority of people the IRS would look into as a result of this policy would not have done a single thing wrong, but when the IRS starts snooping, it will cost you big money. That means hiring a high-priced attorney/accountant who will bleed you dry.
Tuberville’s assertions are exactly wrong. The bank reporting proposal will reduce audits of honest, ordinary taxpayers. The administration’s overall tax enforcement initiative instead shifts the IRS’ enforcement resources in the direction of wealthy individuals and large corporations, whose audit rates have fallen the most in recent years. Under Biden’s plan and the House Build Back Better bill, overall audit rates will not increase for people earning less than $400,000.
In addition, with greater ability to detect suspicious activity, the IRS will be able to target audits more efficiently. That means more productive audits of tax cheats and fewer unnecessary audits of compliant taxpayers. The upshot: If you earn less than $400,000 and you are not cheating on your taxes, President Biden’s proposal makes it less likely that you will be audited and have to turn over the extensive financial information that audits can require.
As Treasury Secretary Janet Yellen wrote to Congress recently: “For already compliant taxpayers, the only effect [of the proposal] is a distinct benefit—a lowered likelihood of costly and burdensome audits.”
4. Information on account flows will be critical for the IRS to spot hidden income streams
The banking industry is also arguing wrongly that the enhanced information reporting will not aid the IRS in stopping tax evasion. But the Biden plan is rooted in a proposal made by two former IRS commissioners and a former IRS associate commissioner for business systems modernization: Charles Rossotti, Fred Goldberg, and Fred Forman. They have explained why basic information on bank account flows is critical:
[The IRS] lacks information on some sources of income, such as much business income earned by individuals and passthrough businesses such as partnerships. This is like a hole in a large bucket — the water will find the hole.
The solution that we and the administration proposed will leverage information and technology to increase voluntary compliance and make the enforcement process more efficient.
By adding third-party reporting that can help identify underreported income, more income will move from the low-visibility category to higher visibility. That is what the additional report proposed by the administration on financial accounts will do. Just like plugging the existing hole in the bucket, this additional information will increase voluntary compliance and help pinpoint deficiencies.
Upgrading IRS technology will also allow the agency to make full use of all its information to increase the effectiveness and efficiency of all IRS enforcement activities when deficiencies are found.
The combination of these elements builds on what works today — providing taxpayers and the IRS the same information for more accuracy in tax return preparation, and providing the IRS the technology to check returns efficiently and to resolve cases promptly and fairly.
It is important to emphasize that the bank reporting proposal does not raise taxes on anyone; it only reforms the tax information reporting system to help catch tax cheats. Collecting the taxes that are already owed is simply a commonsense way to pay for the critical investments in the Build Back Better Act.
Seth Hanlon is a senior fellow at the Center for American Progress.
The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.
Acting Vice President, Economy