As part of the Biden plan, the IRS will know much more about your bank accounts
President Biden announced the American Family Plan today, which is designed to “develop the middle class and extend the benefits of economic growth to all Americans.” The American Families Plan has a lot to love no matter which side of the aisle you are on. Regardless of the measure, the amount of benefits offered is staggering, which begs the question: how are we going to pay for all of this? By increasing IRS enforcement, increasing reporting obligations for financial institutions, and increasing taxes for the rich. Every aspect of this plan deserves its own chronicle. This column will focus on what a senior administration official called one of the “milestones” designed to “ensure that [ ] taxpayers pay the taxes they already owe ”: increased reporting obligations for financial institutions.
Simply put, the American Families Plan requires banks and other financial institutions to report more than a taxpayer’s earned interest, capital gains, and losses. Banks and other financial institutions would also be required to report “aggregate outflows and inflows”. In other words, the IRS will know all of your bank accounts, whether you have earned income on that account or not, how much is in the account in a given year, and how much has been transferred in and out of the account. . It’s unclear how that would work, but what is clear is that this new reporting requirement will create a massive compliance effort on the part of financial institutions and eliminate a massive blind spot that the IRS is currently experiencing.
As it is, most taxpayers are not required to report how much money they have in their bank accounts, how much they have deposited or how much they have withdrawn. Independent taxpayers who – like all Americans – self-report their income and deductions to the IRS are subject to the honor system. W-2 employees, on the other hand, have their salary amount reported to the IRS on their behalf. Lack of information from the IRS on the company’s bank account balance, amount deposited, and amount withdrawn allows the independent taxpayer to lie (or make an honest mistake) about gross receipts or gross income. For some independent taxpayers, it is difficult to resist this temptation. Cheating on taxes by taking wacky deductions is likely to end in an IRS audit, but underreporting of income is harder to track or identify. By requiring banks to report the highest balances and aggregate deposits and withdrawals, the American Families Plan will effectively remove the option of underreporting gross receipts or income for businesses and independent taxpayers.
This, however, can create issues that should be considered and resolved as this plan progresses through Congress. For example, consider a young couple who are saving to buy a house. All savings are placed in the “dream home” savings account. Then, when it comes time to make the down payment, the $ 50,000 in dream home savings goes into the regular checking account, which is then transferred to the seller’s escrow account. Buying a home is not a taxable event (at least for federal income tax), selling is. Will the IRS receive information from financial institutions that leads to an audit?
Conversely, suppose the young couple receives the down payment as a gift from their parents. If the parents donated $ 50,000 to adult children as a down payment, this should be reported on a gift tax return, even if no gift tax is due. This type of donation is made frequently, and in my practice as a lawyer specializing in tax controversies, rarely reported as it should. The increased financial reporting requirement would likely increase compliance with donation tax reporting rules.
If the proposal to require financial institutions to increase their reporting to include account balances, inflows and outflows, is passed, there is no doubt that it will increase taxes collected. The results of self-declaration and audits will likely improve. However, defending against an IRS exam is stressful and can be costly. The Biden administration and Congress should work together to ensure that taxpayers who simply transfer funds between accounts are not audited solely because of the proposed increase in financial reporting requirements for financial institutions.