President Joe Biden pledged to go after corporations and wealthy individuals who are not "paying their fair share" in taxes. But experts say the plan to allow the Internal Revenue Service to gather information on U.S. bank accounts would disproportionately impact small businesses and the very individuals the administration says it's trying to protect.
If approved by Congress, banks would be required to monitor personal and business accounts with more than $600 of activity. Banks would then submit an annual report to the IRS with that aggregated data. According to the Treasury, the reports would allow auditors to identify discrepancies between declared income going into the bank and deposits and investigate irregularities.
"I think the net will catch a lot of small fish and not the big fish that Biden purports to target," said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. "It seems to me, a bait and switch. They purport to go after the one-percenters but in the crosshairs will be small businesses."
Tracking bank transactions would allow the IRS to more easily see cash flow discrepancies at high-cash businesses, like restaurants, laundromats and small grocery stores. It could also reveal undeclared income flows to workers who are typically paid under the table, including nannies, repair workers and day laborers. While it is illegal to conceal income from the IRS, these are hardly the targets the Biden administration described.
The administration has assured the public that the program would be used to recover unpaid taxes from the highest income earners and businesses. Individuals earning less than $400,000 per year, would not face increased tax scrutiny or increased audits, officials claimed.
"I simply don't understand how those two statements can correlate," said Robert Carter, a senior attorney at the Competitive Enterprise Institute and former tax attorney.
Millionaires and large corporations are simply not avoiding taxes by hiding their income in constellations of $600 bank accounts, experts argued. A recent report found 55 of the Fortune 500 companies paid zero income taxes in recent years. That was generally because they leveraged tax cuts and exploited existing tax loopholes, not because they were concealing income in U.S. accounts.
According to the Treasury, the bottom 50% of taxpayers are responsible for just 8% of unpaid taxes on unreported income, while the top 1% owes 28%. Research confirms that it's much easier to audit the income of the bottom 99% of taxpayers than the top 1%. Random audits typically fail to catch less visible income from pass-through corporations, interest, dividends or capital gains.
Yet, the IRS has robust oversight of traditional bank accounts. They receive information on account deposits in excess of $10,000 and also any interest paid on accounts in excess of $10. Additional insight into accounts with $600 or more would provide even greater visibility.
The Treasury estimates the bottom 50% of taxpayers are responsible for roughly 8% of unpaid taxes on unreported income, while the top 1% owes 28%.
Some lawmakers have proposed increasing the threshold to accounts with $10,000 in financial activity. Even then, the IRS is more likely to collect unpaid taxes from a college student with a part-time job than the high-net-worth individuals.
"If this was $100,000, then maybe they're capturing high-net-worth individuals, or $50,0000. But not $10,000 — not even close — and definitely not $600," said Carter.
The plan has caught a lot of flak from lawmakers, banks and individual taxpayers who are worried about the privacy implications, as well as increased cost to comply with the reporting requirements. Some have also argued that the new regulations would force people into non-bank alternatives to more easily evade the IRS. Contrary to certain claims, the IRS would not have direct access to individual bank accounts or account data on individual transactions. The rule would apply to cryptocurrencies and crypto accounts, according to a Treasury report.
Overwhelming, critics worry the plan misses the mark of the administration's stated goal: closing the tax gap, or reducing the difference in taxes owed and taxes collected.
The Treasury Department announced the plan in early spring as a way to recover billions of dollars in uncollected taxes to help pay for President Biden's Build Back Better social spending plan, which is currently being debated by Congress.
Estimates vary on how large the tax gap is. Earlier this year, IRS Commissioner Charles Rettig estimated the government could be owed as much as $1 trillion. The Treasury Department puts the figure closer to $600 billion per year. By enacting new reporting requirements for banks, the Treasury believes the IRS could recover about 6.5% of the lost revenue or $460 billion over a decade.
Carter described that figure as "a pipe-dream." Lawmakers tend to downplay the costs of implementing new reporting requirements and exaggerate how much revenue their offsets will generate. That's especially true if the legislative process is rushed, as critics have claimed the Biden plan has been.
It's also unclear how the IRS, which is "drowning in data," will process the information it hopes to collect from banks, Carter noted. Privacy advocates have questioned how the IRS will protect bank data along with other sensitive taxpayer information. The agency has been hacked several times in recent years and was the subject of a leak involving thousands of tax documents from some of the wealthiest Americans.
Even if the IRS were able to identify the money being concealed, it's still a challenge to collect it. The IRS would have to determine whether laws are being broken or stretched, examine the likelihood of winning the case, then take the matter to court for an undetermined period of time.
"It's not as simple as finding the hidden bank account. ... That's not the way the real world works," Rosenthal said. "If it were that easy, the IRS would have been collecting already."
As part of its tax plan, the Biden administration has requested $80 billion to bulk up IRS enforcement capabilities.
Overall, the Biden administration is seeking to find offsets for up to $2 trillion new spending over the next decade. President Biden has pledged that the money would not come from taxes on people making under $400,000.View This Story on Our Site