1. © 2021 Tax Materials, Inc. TheTaxBook News 1
Release Date: 10/19/21
Financial Reporting
Cross References
• https://home.treasury.gov/news/featured-stories/how-financial-reporting-helps-
american-workers-and-ensures-that-top-earners-pay-their-fair-share
This article was written by Natasha Sarin, Deputy Assistant Secretary for Economic Pol-
icy, and was posted on the US Department of the Treasury website on October 14, 2021.
How Financial Reporting Helps American Workers and EnsuresThat
Top Earners PayTheir Fair Share
A centerpiece of the Administration’s tax compliance agenda includes an important re-
form proposal, known as financial reporting, which would expand the information avail-
able to the Internal Revenue Service (IRS).This information will help the IRS determine
whether taxpayers with opaque sources of income are meeting their tax obligations.
Congressional consideration of this proposal has been marred by misinformation, as op-
ponents have elevated the pernicious myth that banks will have to report all individual
customers’ transactions to the IRS.This is unequivocally false, and an incorrect represen-
tation of the proposals under consideration. Simply put, the financial reporting proposal
in front of Congress does not mandate that individual transactions of any amount be
reported to the IRS.
Instead, the proposal would direct banks to report basic, high-level information on ag-
gregate account inflows and outflows. 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.
Why is aggregate information about account inflows and outflows useful? Because cur-
rently 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. With very
low audit rates for many types of taxpayers—rates that have decreased in the last decade
as IRS resources have been gutted—tax cheats play the “audit lottery,” and wager that
their noncompliance is unlikely to be detected. Providing slightly more information to
the IRS—as the financial reporting proposal would do—will significantly increase com-
pliance because the odds of evasion being detected will rise.
For example, suppose a taxpayer has $1 million of deposits flowing into their checking
account in a year, but reports only $100 of income to the IRS.There may be a benign ex-
planation for this, but it is suspect—and something the IRS can prioritize looking into
when selecting returns for potential audit scrutiny.Yet today, the IRS doesn’t have this
information, so it is often left to guess when it makes enforcement decisions, resulting in
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too much scrutiny of American workers who already pay what they owe—and too little
scrutiny of evaders.
The financial reporting proposal strikes at an unfortunate truth with today’s tax system,
where how people are paid is a major determinate of whether they pay their taxes. Most
working Americans who are paid wages or salaries, like firefighters and teachers, are
making good on their tax obligations. For these workers, the compliance rate on report-
ing their wages is 99 percent.This is because wage earners get a W-2 in the mail each year,
detailing what they’ve earned from their employers, and that same information goes to
the IRS as well. Taxes are automatically deducted from paychecks, and employees pay
what they owe.
High-income earners, however, often accrue business or pass-through income that is not
reported by a third-party to the IRS, so taxes are less likely to be appropriately paid. For
these types of income, compliance rates can be under 50 percent in the absence of any
third-party reporting.That is a large part of the reason why, in 2019, the top 1 percent of
earners in the United States were responsible for an estimated $163 billion in unpaid
taxes. If we were able to collect the taxes that were due from the very wealthiest among
us, this revenue would be more than sufficient to support critical initiatives in the Build
Back Better agenda—such as an expanded Child Tax Credit that lifts millions of children
out of poverty.
The IRS, the Government Accountability Office, and academic experts all agree that
third-party reporting is the best way to improve tax compliance. That is why the Biden
Administration supports an improved financial reporting regime. These changes can
raise hundreds of billions of dollars over the course of the next decade, not by raising
taxes or increasing oversight on American wage and salary workers, but by working to
ensure that those who accrue income in more complex ways pay the taxes they owe.
Specifically, any additional IRS scrutiny will be focused on the high end of the income
distribution, where it belongs, given the distribution of the tax gap. In fact, audit rates will
not rise relative to recent years for anyone making less than $400,000 per year.
In recent congressional testimony, Secretary Yellen was asked whether it was necessary
for the IRS to know detailed information about what types of purchases taxpayers make
each day. The answer is simple, and it bears repeating: No. The financial reporting pro-
posals 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.
Ultimately, the President’s proposal seeks to pare back tax evasion by shedding some
light on opaque sources of income that accrue disproportionately to the top 1 percent
of earners. As such, it is unsurprising that substantial resources are being deployed to
defeat these efforts, because many tax cheats stand to lose from a fairer tax system. But
the American people stand to gain much more. A robust attack on tax evasion will raise
substantial revenue to fund necessary investments in American families, increase the
efficiency and fairness of the tax system, and create a more just society.
Financial Reporting continued