[vc_row bg_type=”bg_color” bg_color_value=”#f5f5f5″ css=”.vc_custom_1618938311697{margin-top: 0px !important;margin-right: 0px !important;margin-bottom: 0px !important;margin-left: 0px !important;padding-right: 1em !important;padding-left: 1em !important;}”][vc_column][vc_column_text el_class=”article-info”]by Mark W. Everson, alliantgroup Vice Chairman and former IRS Commissioner
October 22, 2021 | published in barrons.com[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Poor execution of an otherwise defensible policy initiative can damage the national interest and erode support for government and its institutions. Proposals on the table for the IRS would hamstring the service just as urgently needed plans to revitalize it are set to start.
President Biden is commendably moving to strengthen tax administration. A well-managed and fully functioning IRS is essential to bringing in revenues needed to fund the government, and because so many Americans interact each year with the service, also to maintaining faith in the fairness of government itself. Providing significant monies to rebuild the workforce and enhance information systems will help reduce the tax gap. I worry, however, that imposition of a bank-reporting requirement on cash inflows and outflows will prove all but impossible for the IRS to handle and engulf the service in a damaging political firestorm.
The IRS has done an excellent job implementing Covid relief payments and the Child Tax Credit. Already stretched thin from years of funding reductions, the agency went down early and hard when the pandemic hit and has yet to fully recover. Taxpayer service has deteriorated to abysmal levels, with only 3% of callers able to reach a customer-service representative during the recent filing season and a huge backlog of millions of unprocessed tax returns. My read is the agency is executing well when transactions are routine and can be fully automated but struggling to keep up when matters are more complex and require human intervention.
A steady, multi-year augmentation of taxpayer services, enforcement, and information systems is in order. I favor real growth in appropriations on the order of 3%-5% per annum. Funding in excess of amounts of that magnitude will increase the risk of this delicate organ of government going off center. If I have learned anything in a 50-year career in the private sector and government in the United States and overseas, it is a lot harder to maintain control in an environment of growth than of contraction.
It is true that compliance is much higher if the service can substantiate taxpayer return information through third-party reporting, especially when there is a direct match or information from third parties can be readily aggregated. Over the years, however, the government has been ineffectual in its use of significant amounts of third-party taxpayer information it receives, one recent example being reporting on foreign financial accounts. Because gross cash inflows and outflows won’t easily tie to returns, while the information would certainly be useful for the service to have it will in many instances require contact with the taxpayer to run issues to ground.
In a June 2021 opinion piece in the New York Times, five former Treasury secretaries came out in favor of the Biden administration’s proposal to augment reporting from financial institutions, writing, “We are convinced that better information-reporting requirements can be designed that will permit significant increases in revenue collection without any burden at all on taxpayers and imposing no significant increase in regulatory burdens across the economy.” This assertion is at best naïve, a scary thought given the background of the authors.
The whole point of imposing increased outside reporting is to alter taxpayer behavior and give the IRS data it will use to conduct audits. Secretary Yellen confirmed as much in a recent interview: “If somebody reports an income of $10,000 and they had $3 million go out of their checking account, that tells the IRS that’s an individual you might audit.” And yes, audits are a burden on taxpayers; just ask anybody who has had one. By construction the new reporting will generate tens of thousands of audits and inquiries to taxpayers, many of whom will ultimately be deemed in compliance. Secretary Yellen’s statement also confirms what only stands to reason, that the $400,000 income figure below which Treasury promises there will be no increase in audits is a moving target rather than a red line; it depends on what the government thinks the taxpayer’s income might be rather than what is on the return as filed.
It will be tough enough and take years for the IRS to restore adequate taxpayer services and a robust enforcement presence that fully respects taxpayer rights. Both are essential to maintain support for the agency over the long haul. Such an effort will be difficult, coming as it does on the heels of the unprecedented and alarming disgorgement of tax-return data to ProPublica. Even at the higher reporting thresholds recently suggested, cashflow reporting will impact countless small businesses and generate further controversy.
There is much to like in the Biden proposals to improve tax administration and help shrink the tax gap, but I hope Congress drops bank reporting from the final package.[/vc_column_text][/vc_column][/vc_row][vc_section][vc_row][vc_column][vc_separator][/vc_column][/vc_row][vc_row css_animation=”fadeInRight”][vc_column][vc_custom_heading text=”About the Author” use_theme_fonts=”yes” css=”.vc_custom_1621268389440{margin-bottom: 20px !important;}” el_class=”alt-h1″][/vc_column][vc_column width=”1/4″][vc_single_image image=”18976″][/vc_column][vc_column width=”3/4″][vc_column_text]The Honorable Mark W. Everson served as Commissioner of Internal Revenue from 2003 until 2007. Prior to joining the IRS, Everson held Bush administration posts as Deputy Director for Management for the Office of Management and Budget (OMB) and Controller of the Office of Federal Financial Management. Everson also served in the Reagan administration, holding several positions at the United States Information Agency and the Department of Justice. In the private sector, Everson served as Group Vice President of Finance at SC International Services, Inc., a $2 billion food services company, and as an executive with the Pechiney Group, one of France’s largest industrial groups.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_separator][/vc_column][/vc_row][/vc_section][vc_row][vc_column][vc_row_inner][vc_column_inner]
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