This is what is happening to the US government. Every year, hundreds of billions of taxes
unpaid bills, and this “tax gap” leaves fewer resources to pay our country’s bills. Most workers, whose employers collect taxes and report their income, pay what they owe. It is disproportionately very rich
people who find creative, and sometimes illegal, ways to sneak through that door. And they get away with it, in part, because the Tax service
lack of resources to pursue them.
As part of a plan to rebuild the IRS after a decade of decline, President Biden makes sense Solution
: Require financial institutions to report additional taxpayer information, which the IRS can then use to determine who might avoid tax.
The requirement would be straightforward and the additional burden on banks would be minimal. Banks would simply add two numbers they already have – the total annual inflows and outflows for each account – to an existing form they already provide to the IRS. Individual taxpayers would have nothing to do, and no details transaction data
would be shared.
Reporting this data is so critical because it gives the IRS a warning when a taxpayer’s true financial position – as reflected in aggregate account flows – differs from what was reported.
Third party reporting
– independent information that helps IRS verify tax returns – increases tax compliance from under 50% to over 95%. For wealthier taxpayers, income often falls outside of existing reporting streams. The main source of the tax gap is this low visibility income
, such as royalties, capital gains, and some types of Business income
, which disproportionately benefits the wealthiest in the country. About a fifth to half of this income goes not reported
, gaining visibility is therefore essential to make up for this shortfall.
These incremental reports are essential to revitalizing the IRS. Number of listeners
review of returns has declined significantly over the years, and less than 1% of partnerships
(like LLCs) are audited annually. But investments needed to replenish audit staff and upgrade obsolete computers
can only reach their full potential when paired with the right information.
Improved reporting also addresses serious economic and racial inequalities in the application of tax laws. Verifying complex returns from high income taxpayers may take hundreds of hours
by return. With neither sufficient staff nor any idea of ââwhere to target their audits, the IRS
is about as likely to audit a low-wage worker
who receives the earned income tax credit as a person in the top 1%, even though the amount involved is much lower.
It is a scandal that the rich, who are more likely to avoid paying taxes, are so often given a pass. Improved reporting, along with more officers trained to decipher complex tax returns, will allow the IRS to target high-end enforcement actions instead of focusing on low-income taxpayers.
Lobbyists who want to protect the status quo claim that better reporting would discourage people of color from using the banking system. These claims are false. They ignore that the policy is carefully designed to protect privacy and imposes no burdens on individuals, and in fact would increase income to pay for initiatives that encourage households of color to become banked. Monthly child tax credit payments, for example, can be directly deposited into bank accounts.
Better tax enforcement will advance the interests of honest taxpayers, who deserve to know that others are paying what they owe, and honest business owners, who face unfair competition from tax evaders. This is why a bipartisan group of former treasury secretaries, including myself, endorse
Congress is expected to adopt this important provision. This will generate substantial income and create a fairer tax system, where all people – not just ordinary American workers – pay what they owe.