We pleased to share with you an important and timely commentary published today in Bloomberg Opinion. In it, writers Charley Ellis and Alexander Boyle take on critics of the Biden Administration’s plan to properly fund the IRS. Charley is a legend on Wall Street and Alex is former Vice Chairman of Chevy Chase Bank.
Charley and Alex focus on the “information reporting” component of the plan and knock off one by one the specious claims of the banking trade associations.
The hyperbolic claims of the banking trade associations are at fever pitch because the larger IRS funding proposal has strong support and traction in Congress, and the specific information reporting component is at the heart of the Administration’s plan to have better targeted and effective audits.
For more information about the Shrink the Tax Gap program, please go to our website, www.shrinkthetaxgap.com.
Bloomberg Opinion
Banks Are Wrong to Fight Proposed New IRS Disclosure Rule
Collecting more information about taxpayers’ accounts is more effective in getting people to pay what they owe and far less intrusive than conducting more audits.By Charles Ellis and Alexander Boyle; September 28, 2021
Few among us want the Internal Revenue Service to conduct more audits. So what’s the best way for the IRS to shrink the tax gap — taxes owed but not paid? The key is better targeted audits, not just more of them. And the key to more effective audits is information.
The Biden administration budget now being considered by Congress calls for $80 billion in new funding over 10 years for the IRS to hire the staff and adopt the 21st century technology necessary to begin closing the $600 billion annual tax gap.
A critical component of the administration’s plan would enable the IRS to evaluate the amount of deposits and withdrawals flowing through bank accounts above a $10,000 threshold. This reporting is important for two reasons.
First, knowing that the IRS will have information that could highlight the underreporting of revenue on a tax return will make taxpayers more mindful of the perils of tax evasion and encourage honest reporting.
Second, knowing how much money flowed through an account will enable the IRS to better target which tax returns should be examined and possibly audited by comparing the cash coming into accounts with the amounts reported on returns. If there was a significant discrepancy the IRS would ask the taxpayer for more information.
Without this additional deposit and withdrawal reporting, shrinking the tax gap will have to rely solely on an expanded audit program, which will take many years to implement and wouldn’t be anywhere near as effective or desirable.
Curiously, the banking industry is fighting the proposed increased reporting on a variety of grounds such as “privacy concerns”, technical issues and, revealingly, “putting our customers in an untenable position.” None of these reasons withstand scrutiny.
First, expanding the use of IRS form 1099, which reports miscellaneous income such as bank account interest, won’t reveal any personal or proprietary information, and is far less intrusive than an audit. Taxpayers and the IRS already receive a 1099 on any bank account that earns more than $10 interest in a year. This new requirement would simply add two line items to this form: aggregate deposits and withdrawals.
Second, industry experts, such as the Chief Information Officer of a large bank that worked with one of us, tell us that the proposed new form 1099 would be simple to enact and virtually cost-free because the underlying data is already in bank computers; taxpayers wouldn’t have to do anything.
Finally, putting the bank’s customers in an “untenable” position is only an issue if the customer is willfully evading taxes.
The banking industry and their lobbyists are making a strategic mistake in opposing the Biden administration’s tax-compliance initiatives, especially the added reporting requirements. Banks benefit enormously from their close association with government. Here are three examples: A strong regulatory regime fosters the industry’s safety and soundness; the Federal Reserve provides liquidity in emergencies; and the Federal Home Loan Bank supports residential mortgage lending.
In return, the banking industry helps government shoulder the burden of compliance with a variety of laws and regulations. In addition to banks providing taxpayers and the IRS with billions of form 1099s on interest earned, banks with securities activities report all dividends earned as well as the aggregate revenue of securities sold during a year so that gains or losses can be appropriately reported on the taxpayer’s return. Also, banks report large cash transactions and a variety of other “suspicious activities” to the appropriate government department for investigation.
Given this longstanding record of cooperation between government and the financial services industry, all with the intent of ensuring compliance with laws and regulations, it’s puzzling that the banking lobbyists are so aggressively fighting the administration’s efforts to add a minor level of additional reporting that could dramatically reduce the massive tax cheating by mostly upper-income earners in the U.S. each year.
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Shrink The Tax Gap 
This would not be difficult for the banks – for sure. It would not be difficult to take in this information either. However, the taxpayers whom are already afraid of IRS see this as “big brother” and will rally strongly to their banks and congressmen to get this stopped. Congressional representative listen to their constituents. Mostly will not read this “Shrink the Tax Gap” and the pushback will be huge. However, perhaps more public forum and information in social media would be useful to help educate that this is less about intrusiveness than it is catching the High-Income Non-filers that originated this idea in the first place. Not enough out there about the reality of this effort.
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