President Biden’s push to enlist a beefed-up IRS to wring additional money out of large corporations and wealthier taxpayers is being greeted with skepticism from the banking industry and stoking fears that tax collectors will mishandle law-abiding Americans’ deposit and withdrawal information.
Mr. Biden wants to increase funding for the IRS to try to close the “tax gap,” the estimated difference between taxes owed and taxes paid. The extra resources would be used to target larger corporations and the wealthy who might be hiding taxable income.
As part of his $1.8 trillion “American Families Plan,” the president also proposed requirements that financial institutions expand their annual reporting to cover account inflows and outflows — a step beyond the typical wage and earnings information that Americans provide the federal government when they file income tax returns every year.
Pete Sepp, president of the National Taxpayers Union, said there are legitimate concerns about exactly how the IRS would use the additional money and power.
“The more data the government has and the more it exchanges, the greater the risk of a breach and all of the problems that come with it,” Mr. Sepp said. “Talk about infrastructure policy. I mean, does the IRS have the infrastructure in place to even manage this information?”
Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, said the administration has the right idea on the reporting requirements but that the scope is much too broad and would likely leave the IRS with reams of relatively useless information.
“There is a question of intrusiveness and, of course, privacy to some degree as to how much scope and flexibility do we want to allow the IRS in the absence of any suspicion of wrongdoing,” he said. “My wages are given to the IRS. My investment returns are given to the IRS. They know a lot about me already, and so the question then is: How much more would we [as] a society want to share with them?”
He said the concealment or omission of taxable income, which the additional reporting requirements would presumably be designed to catch, does happen but sophisticated tax evasion would still be a problem with stepped-up enforcement.
“You address that with making the tax laws simpler, is my fundamental recommendation,” he said.
He pointed to a separate proposal from Charles Rossotti, who served as IRS commissioner in the Clinton and George W. Bush administrations, that is intended to more narrowly target businesses prone to underreporting income.
“The Biden administration could get there, I think, if they target the proposal more,” he said.
The requirement for banks to report annual account inflows and outflows would extend to peer-to-peer payment services such as Venmo but wouldn’t require individuals and businesses to report any additional information to the government, according to an article in The Wall Street Journal.
That news prompted Americans for Tax Reform, an anti-tax advocacy group, to blast out that “Biden Wants the IRS to Snoop on Your Venmo Account.”
“It is hard to see how millionaires and billionaires are using Venmo or CashApp to launder mass amounts of money,” the group said in an email blast. “This is just another effort to expand the power of the IRS. Rest assured, the IRS will use these powers against Americans of all income levels.”
Conservatives have long been wary of the IRS. Those fears materialized during the Obama era when the agency was forced to acknowledge that it singled out right-leaning political groups for additional tax scrutiny.
The Treasury Department said the new requirements don’t increase any reporting burdens on taxpayers and would simply make financial institutions add account inflow and outflow data to their annual reports.
“Providing the IRS this information will help improve audit selection so it can better target its enforcement activity on the most suspect evaders, avoiding unnecessary (and costly) audits of ordinary taxpayers,” Treasury said.
The banking industry is assessing the implications of what isn’t yet full-fledged legislation.
“The IRS currently has broad authority to access this data, but under the proposal, the administration would essentially be requiring banks to become a tool in the IRS arsenal,” said one industry expert familiar with bank privacy issues. “We also have strong concerns surrounding the sensitive nature of customer information that would be shared, and if the agency plans to make this information public, that would be deeply troubling.”
Mr. Rosenthal said average taxpayers wouldn’t have to actively do much more but the mere threat of additional enforcement could send people scrambling to put their financial affairs in order.
“Even if the IRS never uses it, even if it sits in a warehouse like in ‘Raiders of the Lost Ark’ … the question is: Will taxpayers be scared?” he said.
He said he wasn’t sure that Americans would change their behavior and that most would probably be inclined to trust the IRS not to misuse personal information.
“But it’s hard to tell how much scaring will go on,” he said. “And for taxpayers that are really scared, they could take steps to conceal their business receipts, say, by putting them in multiple institutions — maybe in someone else’s name like an LLC or some other entity.”
Democrats have talked for years about ways to close the “tax gap.” The plans usually involve spending more money on the IRS.
“Thanks to years of deliberate underfunding of the IRS, wealthy tax cheats have been able to go unpunished, leading to the tax gap … to reach over $1 trillion a year,” said Morris Pearl, who chairs the Patriotic Millionaires, an advocacy group.
The administration estimates that a funding boost for the IRS, combined with the new reporting requirements and improved technology, would generate $700 billion in revenue over 10 years.
The Penn Wharton Budget Model said in a study this week that the plan would raise about $480 billion.
“This is going to allow them to evaluate who to audit easier rather than just do pure, random audits,” said Richard Prisinzano, the budget model’s director of policy analysis. “And then the audits will be more successful because they will sort of already have done a big information piece.”
Mr. Rossotti, though, said the potential returns could be much bigger.
He and former IRS Commissioner Fred Goldberg estimated that the federal government could generate $1.4 trillion over 10 years through increased third-party reporting, improvements in technology and reconfiguring how the IRS conducts audits.
“Yes, this program would require a multiyear commitment to increased spending, but over time it would produce revenue equal to 15 to 20 times its cost while increasing the fairness and sustainability of the tax system,” they said in an op-ed this year for Bloomberg Tax.