The US Treasury Department estimated that wealthy taxpayers as a group are hiding billions of dollars in income, a conclusion that should support the Biden administration’s call for Congress to approve expanded IRS funding and general new financial transaction reporting requirements.
The department, in a report on Thursday, outlined the administration’s proposed measures to generate additional revenue of $ 700 billion over a decade through the enforcement of the Internal Revenue Service. The release follows criticism from Republican lawmakers and tax analysts that the estimate is unrealistically high.
Read More: Biden’s $ 4 Trillion Tax Math Meets Congressional Scorekeeper
The Enforcement Plan is central to President Joe Biden’s drive to fund approximately $ 4 trillion in long-term economic proposals. The administration asked banks and cryptocurrency exchanges to report transactions to the Internal Revenue Service, which would also get new auditors and an updated information technology system.
“The IRS will be able to use this new information to better target enforcement activities, increase control of wealthy outliers and reduce the likelihood of fully compliant taxpayers being subjected to costly audits,” the Treasury Department said of the proposed reporting requirements .
Income from small businesses, rentals, and other so-called pass-through businesses are increasingly becoming a target for the Biden team as it seeks ways to bridge the tax gap – the projected difference between taxes owed and taxes paid to reach $ 7 trillion over the next decade .
WATCH: A new study shows the richest 1% of Americans hide income from the IRS.
Source: Quicktake
Account flows
While both Democrats and Republicans have supported stronger enforcement as a means of paying for long-term economic development programs, challenges have emerged. GOP lawmakers have warned of overburdening the government – especially with regard to accounting flow reporting – and rules of Congress could limit the Democrats’ ability to apply the Treasury Department’s estimate to funding Biden’s spending plans.
Read More: Biden’s $ 4 Trillion Tax Math Meets Congressional Scorekeeper
The Treasury Department’s plan calls for banks and financial institutions to report account flows – information that the IRS does not currently have. The idea is to make pass-through income more like wages that employers have to report to the agency.
Taxpayers only report 45% of their income when the IRS has no visibility into their earnings, the Treasury Department estimates. This is comparable to a 99% compliance rate for wages that requires employers to report to the IRS, the Treasury Department said.
IRS estimates
“Discerning taxpayers and those who advise them are well positioned to shield unpaid taxes,” the Treasury Department said. Examples include pass-through income, which “can be difficult to match with ultimate owner,” and capital income flowing into offshore accounts, according to the Treasury Department.
The gap between taxes owed and taxes paid on partnership, suburban and home ownership income is estimated “to be around $ 200 billion per year, with the percentage of net misreports exceeding 50% for certain income categories “said the Treasury.
Revenue from partnerships is a particular challenge, the Treasury Department said. This share of total income rose from less than 5% in 1990 to more than 35%. More than 4.2 million partnership returns were filed in 2018 – more than twice as many as corporate returns – but the IRS only examined 140 of them, the Treasury Department said.
Also important was the increasing number of high-income Americans simply not filing tax returns, the Treasury Department said. The Treasury found that there were nearly 900,000 high-income non-applicants between 2014 and 2016, and 44% of those cases were never investigated. Around 300 of the “most egregious outliers have cost the federal government $ 10 billion in unpaid tax liabilities,” the report said.
New requirements
New requirements for account reporting should help address the challenge.
“The annual return would show gross inflows and outflows across all business and personal accounts of financial institutions, including bank, credit and investment accounts,” the report said. “The reporting system would also cover foreign financial institutions as well as stock exchanges and custodian banks for crypto assets.”
Cryptocurrency transfers worth $ 10,000 or more are reported to the IRS.
The Treasury Department said the new reporting system will go into effect in 2023 to give financial institutions time to prepare for the new requirements. The Treasury Department estimates that the increased visibility into taxpayers’ accounts alone would raise the IRS $ 460 billion of the $ 700 billion in a decade.
More money would be raised through increased scrutiny. Biden proposes an infusion of $ 80 billion into the IRS to hire new specialized exam staff and improve technology systems. This funding is expected to generate nearly $ 320 billion in revenue, or $ 240 billion in net cash after the original investment, tax officials said while speaking to reporters.
The additional funding would allow the IRS to hire around 87,000 employees by 2031, roughly doubling the agency’s workforce, according to the report.
The Treasury Department estimates its proposals would raise $ 700 billion this decade and $ 1.6 trillion over the next 10 years. External scorekeepers have forecast lower returns. For example, the Penn Wharton Budget Model has valued $ 480 billion over a decade.
1960s system
It’s unclear whether the full $ 700 billion will be counted under Congressional scorekeeping rules to offset the cost of the Biden Plan. When prompted, finance officials said the money raised from the plan would bring in real dollars and that lawmakers in Congress should review their processes so that those dollars can count.
But the Treasury Department said its estimates were “conservative”. Some dynamics, such as IT systems overhaul and better voluntary compliance due to higher audit probabilities, are not factored into the total, the report says.
The Treasury Department made a detailed case for revising the IRS’s obsolete technology. The central system for processing tax returns, which processes more than 150 million individual returns every year, was first developed in 1962 and is therefore “one of the most risky systems in the federal government,” according to the Ministry of Finance.
“The result today is decades of tax law written in a programming language that is no longer taught, a data platform that is very complex to maintain, and an outdated system that is supported by a limited number of employees – including the Half is entitled to retire, ”says the report.
(Updates with details on underreported income estimates beginning with the “IRS Estimates” subheading.)
How to contact the reporters on this story:
Laura Davison in Washington at ldavison4@bloomberg.net;
Christopher Condon in Washington at ccondon4@bloomberg.net
To contact the editors responsible for this story:
Joe Sobczyk at jsobczyk@bloomberg.net;
Scott Lanman at slanman@bloomberg.net
Christopher Anstey
© 2021 Bloomberg LP All rights reserved. Used with permission.