The Internal Revenue Service has recently gotten a lot of attention on social media, specifically, a proposal by the Biden administration to widen authority to root out tax evasion by allowing the IRS to get annual reports of money flows from bank accounts with a minimum of $600. Under this proposal, banks would be required to submit annual reports to the IRS on “gross inflows and outflows” on accounts – both business and personal – with at least $600 or with transactions of at least $600 in a year.
Treasury Secretary Janet Yellen has stated this proposal would provide helpful information to fill the possible $7 trillion tax gap the IRS believes is being lost each year. Wow! $7 trillion that Americans are hiding in their personal and business bank accounts and not paying taxes on? That’s hard for me to believe the number is anywhere near that big. How do they come up with these numbers?
So let’s take one possible scenario. Let’s say next year you decide to sell your home and move up to a nicer, bigger home. Because of the last few years of increasing home prices, you now have a lot of equity in your home. In the process of selling your current home and finding the new home, you decide to take part of your equity, possibly $30,000, and use it to update the kitchen in the new home. Next year you file your taxes as normal, but before the IRS mails your tax refund back to you, they now want to see documentation of where this $30,000 came from that was deposited into your bank account last year. In theory, this would be fairly easy to document, but if you think this would be a couple of easy phone calls or possibly writing a letter to the IRS to clear this up, then you’ve clearly never dealt with the overwhelming bureaucracy of the IRS.
I’m certainly not opposed to rooting out tax cheats, but I’m also not a big fan of bigger government either. I am a small business owner and I can’t tell you how much junk mail I receive from the Internal Revenue Service each year. I only have two employees, yet I get enough mailings from the IRS to fill a large recycling bin each year. Most if it I don’t even know what it is, so I scan and email to my CPA and ask him if this is something I need or not. Also, at least once every other year, they mail me a certified letter stating that I owe them money for this or that reason. My accountant sends me the documentation I need to verify that it was paid, but the IRS then wants me to go to their website, print out another form, fill it out and sign it, then mail it back to them. And if I don’t mail it to them within 20 days, I will owe late fees. It’s nuts!
Here’s the worst part though. I read an article about this last week that stated several experts say it is currently unclear how helpful the information would be for the IRS to catch tax cheats currently. Steve Johnson, a professor at Florida State University and scholar on tax procedure, noted, “Right now, the IRS clearly does not have the human and financial resources to do anything meaningful with an influx of a lot of information. Apart from recent budgetary problems, the single biggest problem the IRS has had, historically, is its dreadful information systems.”
The Biden administration wants to give the IRS an additional $80 billion over ten years to increase the agency’s workforce by 87,000 new employees across that time period and invest in technological improvements. Garrett Watson, a senior policy analyst at the Tax Foundation, told CNN it would “require years of software updates” in order for the IRS to effectively use the information they want. “That’s probably the place to prioritize first and revisiting this proposal later, once they actually deploy the software that should make it useful,” Watson said.
This is why I’m not a fan of big government. They can’t effectively use the resources they currently have so they try to solve the problem with more government spending. Where does this end?
Well in this case, I think they’re fighting a huge uphill battle because virtually ever bank in America is against this policy because it would force more internal accounting and costs upon the banks themselves. Personally, I believe we need to simplify the IRS, not make it bigger.