Banks Are Wrong to Fight Proposed New IRS Disclosure Rule

(Bloomberg Opinion) -- Few among us want the Internal Revenue Service to conduct more audits. So what's the best way for the IRS to shrink the tax gap — taxes owed but not paid? The key is better targeted audits, not just more of them. And the key to more effective audits is information.

The Biden administration budget now being considered by Congress calls for $80 billion in new funding over 10 years for the IRS to hire the staff and adopt the 21st century technology necessary to begin closing the $600 billion annual tax gap.

A critical component of the administration’s plan would enable the IRS to evaluate the amount of deposits and withdrawals flowing through bank accounts above a $10,000 threshold. This reporting is important for two reasons.

 First, knowing that the IRS will have information that could highlight the underreporting of revenue on a tax return will make taxpayers more mindful of the perils of tax evasion and encourage honest reporting.

 Second, knowing how much money flowed through an account will enable the IRS to better target which tax returns should be examined and possibly audited by comparing the cash coming into accounts with the amounts reported on returns. If there was a significant discrepancy the IRS would ask the taxpayer for more information.

Without this additional deposit and withdrawal reporting, shrinking the tax gap will have to rely solely on an expanded audit program, which will take many years to implement and wouldn't be anywhere near as effective or desirable.

 Curiously, the banking industry is fighting the proposed increased reporting on a variety of grounds such as “privacy concerns”, technical issues and, revealingly, “putting our customers in an untenable position.” None of these reasons withstand scrutiny.

 First, expanding the use of IRS form 1099, which reports miscellaneous income such as bank account interest, won't reveal any personal or proprietary information, and is far less intrusive than an audit. Taxpayers and the IRS already receive a 1099 on any bank account that earns more than $10 interest in a year. This new requirement would simply add two line items to this form: aggregate deposits and withdrawals.

Second, industry experts, such as the Chief Information Officer of a large bank that worked with one of us, tell us that the proposed new form 1099 would be simple to enact and virtually cost-free because the underlying data is already in bank computers; taxpayers wouldn’t have to do anything.

Finally, putting the bank's customers in an “untenable” position is only an issue if the customer is willfully evading taxes.

The banking industry and their lobbyists are making a strategic mistake in opposing the Biden administration’s tax-compliance initiatives, especially the added reporting requirements. Banks benefit enormously from their close association with government. Here are three examples: A strong regulatory regime fosters the industry’s safety and soundness; the Federal Reserve provides liquidity in emergencies; and the Federal Home Loan Bank supports residential mortgage lending.

In return, the banking industry helps government shoulder the burden of compliance with a variety of laws and regulations. In addition to banks providing taxpayers and the IRS with billions of form 1099s on interest earned, banks with securities activities report all dividends earned as well as the aggregate revenue of securities sold during a year so that gains or losses can be appropriately reported on the taxpayer’s return. Also, banks report large cash transactions and a variety of other “suspicious activities” to the appropriate government department for investigation.

Given this longstanding record of cooperation between government and the financial services industry, all with the intent of ensuring compliance with laws and regulations, it's puzzling that the banking lobbyists are so aggressively fighting the administration’s efforts to add a minor level of additional reporting that could dramatically reduce the massive tax cheating by mostly upper-income earners in the U.S. each year.

Yes, $80 billion is a big increase for the IRS, but the IRS’s workload is way up and staffing is way down. Incredibly, the IRS’s budget today relative to GDP is around 50% of what it is was in 1993. Further, the Biden administration says its $80 billion investment would raise $780 billion in the first 10 years, a return on investment of more than 9 to 1. More than half of that return comes from this new information reporting requirement.

People love to hate the IRS, but it’s in everyone’s interest for the IRS to be efficient and effective, which today it is not. The Biden plan to properly fund the IRS and close the tax gap is desperately needed. Shouldn’t we collect taxes that are owed before we raise new taxes on people who already pay what they owe?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Charles Ellis is the founder of Greenwich Associates.

Alexander Boyle is a former vice chairman of Chevy Chase Bank.

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