IRS Plans to Track Down Tax Cheats
The proposal targets high-income taxpayers, but enforcement wouldn’t be limited to the top 1%.
At a time when Americans are deeply polarized on many issues, the need to crack down on tax scofflaws is one topic that probably won’t trigger a Thanksgiving dinner squabble. Lawmakers like the idea, too, because narrowing the tax gap—the difference between the total taxes owed and the amount that goes unpaid—could fund billions of dollars in government spending on infrastructure, child care and other initiatives. Estimates of the size of the tax gap vary, but IRS Commissioner Chuck Rettig made headlines earlier this year when he estimated that it exceeds $1 trillion annually. When it comes to specifics, though, some proposals to recover outstanding taxes could give even honest taxpayers pause, particularly if they have privacy concerns.
The Biden administration has proposed increasing the IRS budget by $80 billion over the next decade, which would fund, among other things, the cost of hiring 5,000 new enforcement agents. The administration has emphasized that the proposed increase in audits, which have plummeted in recent years, would focus on large corporations and individuals who earn more than $400,000 a year.
Unlike taxpayers who have taxes withheld from their paychecks, wealthy individuals tend to earn more of their income from investments and other “non-labor” sources that aren’t subject to withholding. But if you’re self-employed or have invested in cryptocurrency, measures to reduce the tax gap could affect you even if you earn less than $400,000 a year.
Too much information? In an effort to crack down on sole proprietors and self-employed taxpayers who underreport their income (or inflate deductions), the Biden administration wants to require banks to report the amount of withdrawals and deposits made during the year—in addition to interest earned. For example, a Form 1099-INT, which banks send to the IRS and their customers every year, might show that a customer had $100,000 in deposits, $20,000 in withdrawals and $400 in interest. The Treasury Department says this additional information would help the IRS identify taxpayers who aren’t reporting all of their income. But the amount of information the reporting requirement would generate has already led to pushback from privacy advocates, the banking industry and Republican lawmakers. Critics say it would bury the IRS in information, much of it not useful for enforcement purposes.
Separately, the Treasury Department wants to require payment services and businesses that accept cryptocurrencies to report transactions that exceed $10,000—a requirement that already applies to cash transactions. Taxpayers who have invested in cryptocurrency need to keep good records because it’s “going to be a big focus area” for the IRS, says Tim Speiss, a partner with accounting firm EisnerAmper. The IRS is concerned that some investors are using cryptocurrency to shield income from the government, contributing to the tax gap.
The upside. While much of the focus on the administration’s proposal to shrink the tax gap has been on enforcement, there are sweeteners in the plan, too. Increasing the IRS budget would help the agency replace outdated technology and improve customer service, the Treasury says, which was abysmal during the pandemic. Taxpayers who tried to call the IRS endured long wait times, and fewer than one-fourth of them got through at all. Meanwhile, the IRS is still processing refunds for 2019 tax returns and has warned that taxpayers who filed their 2020 tax returns on paper can expect delays, too.
In part, those problems reflected the increased responsibilities of the IRS, as it was tasked with distributing billions of dollars in economic stimulus checks. But the agency has also seen its workforce decimated over the past decade by a series of budget cuts. The Biden administration wants to reverse that trend by adding customer service representatives, including staffers dedicated to helping taxpayers navigate recently expanded programs, such as the advance child tax credit.
Crackdown on Tax Preparers?
The Biden administration has renewed efforts to regulate tax preparers, something the IRS has tried unsuccessfully to do for years. Although a few states require tax preparers to register and meet minimum standards, there is no federal oversight of tax preparers. Consumer groups say that has made the business ripe for fraud. An IRS regulation that would have required tax preparers to pass a competency exam and take continuing-education courses was struck down by a federal district court in 2014. The Biden administration has called on Congress to enact legislation giving the IRS the authority to regulate tax preparers. It also wants to increase penalties for “ghost” preparers—individuals who prepare a tax return and fail to sign it.