The Treasury is defending its proposal tofor nearly all Americans, after pushback from the finance industry and Congressional Republicans made the proposal a subject of heated debate in Congress.
A senior Treasury official told CBS News that tracking a small amount of information for nearly every bank account in the U.S. would help the IRS spot high-income people who are skipping out on taxes. Tracking the information would also provide additional verification that low-income workers are meeting their obligations.
The Treasury’s proposal has been criticized for a cutoff that appears exceedingly low — just $600 in a bank account, or a single $600 purchase, would be enough to trigger disclosure, according to an initial plan released in May. It now seems likely that number will rise to $10,000. But the financial industry claims that small business owners and independent contractors would be caught in a “dragnet” of surveillance — rather than the wealthy.
“While the stated goal of this vast data collection is to uncover tax dodging by the wealthy, this proposal is not remotely targeted to that purpose or that population,” the American Bankers Association and a coalition of business groups wrote last month.
However, according to a senior Treasury official, the reason for setting the cutoff at such a low amount is not to trap low-income earners but rather to block wealthy people from sidestepping scrutiny. That’s because a high threshold for disclosure — say, $100,000 — could easily be avoided if wealthy people simply moved money between several smaller bank accounts. After all, it’s not uncommon for one person to have multiple bank accounts.
The nation’s tax-evasion problems come from many places. But one major reason, according to researchers, is that rich people who don’t rely on work for income routinely fail to report earnings to the IRS. For instance, the wealthy are more likely to receive income from capital gains and assets such as real estate and businesses than the typical worker, whose earnings are reported to the IRS via tax forms such as W2s and 1099s.
Every year, tax evasion by the top 1% of Americans costs the system $160 billion, according to one estimate. The IRS commissioner has said that the overall cost of missed taxes could be much higher — as much as $1 trillion every year.
Right now, “the IRS has no knowledge about whether taxpayers who earn income in hard-to-track ways are making good on their annual tax obligations. Taxpayers who want to shirk their tax obligations know about and exploit this information shortfall,” Natasha Sarin, deputy assistant secretary for economic policy, wrote in a blog post Thursday.
Because so much income from the wealthy goes unreported, a plan to only track bank accounts of the self-declared wealthy would likely miss a lot of income, the senior Treasury official said.
The IRS’ lack of knowledge today means it usually has to guess whom it should audit, the post said, which leads to “too much scrutiny of American workers who already pay what they owe — and too little scrutiny of evaders.”
Instead, tracking nearly all bank accounts would allow the IRS to reconfirm taxpayers are paying what they owe, while flagging cheaters undetected by other means. “Providing slightly more information to the IRS — as the financial reporting proposal would do — will significantly increase compliance because the odds of evasion being detected will rise,” Sarin wrote.
Sarin’s blog post also took aim at some misconceptions around the proposal, which would not reveal specific spending data.
“The financial reporting proposals under consideration do not include any information about specific transactions or what taxpayers buy. The IRS will receive no information whatsoever, and will have no ability whatsoever, to track specific transactions under this proposal,” she wrote.
“[T]he financial reporting proposal in front of Congress does not mandate that individual transactions of any amount be reported to the IRS,” Sarin added. Instead, “Banks would add just a bit of additional data to information that they already supply to taxpayers and the IRS: how much money went into the account over the course of the year, and how much came out.”
CBS News’ Sarah Ewall-Wice contributed reporting.