Earlier this year, the Biden Administration released details of its plan to close the tax gap in order to find ways to finance an increase in government spending. The Administration is right to target the tax gap but wrong in its proposed solution to force credit unions to spend resources on new reporting requirements to the Internal Revenue Service (IRS), essentially making financial institutions an extension of the IRS.
As currently proposed, financial institutions would be required to file an annual information return for any and all business and personal accounts based on the inflows and outflows in a given year. While initially reported as a way to target wealthy tax evaders to close the tax gap, the President’s budget proposes that it includes any account with over $600 in activity, meaning almost all Americans would be included. While the goal of closing the tax gap is laudable and something we all can support, many questions have arisen about the effectiveness of such a move to address the issue.
Instituting these requirements would require credit unions and other financial institutions to completely revamp and overhaul their internal reporting structures for all accounts with a gross flow above $600, which would be cumbersome, costly, and potentially increasingly complex if the reporting regime is expanded further.
Since news broke of the plan, NAFCU has engaged the Administration and policymakers on the Hill to oppose the plan. In addition to highlighting the regulatory burdens, NAFCU has stressed the importance of ensuring a detailed cost-benefit analysis to assess the viability and impact of such a proposal. As it currently stands, it is unclear if more data, rather than more effective use of current data, would lead to more tax compliance.
Additionally, protecting account holder data and privacy related concerns should be top of mind for lawmakers too as these new requirements would provide the IRS with access to more of American consumers’ financial data. Keep in mind, the IRS has faced serious challenges in combating identity theft and false tax returns filed to claim illegal refunds.
Policymakers would be better off increasing IRS funding to hire staff, facilitate targeted auditing of questionable returns and suspicious foreign transactions, and enhance established systems to better analyze current data. This would be a much more efficient and effective approach to closing the tax gap, while not creating new costs and burdens for credit unions and the millions of hard-working Americans they serve.
Connect with Dan Berger on Twitter @BDanBerger.