On May 20, 2021, the Treasury Department released a 24-page “compliance agenda” providing details of the tax compliance proposals under The American Families Plan (the “Plan”) proposed by the Biden Administration. The agenda focuses on four broad areas intended to improve the efficiency and functionality of the U.S. tax system. Broadly, the Plan proposes to provide the IRS with a significant budget increase to fund greater enforcement, expand tax information reporting to identify potential noncompliance, overhaul and modernize antiquated IRS technology, and adopt the statutory authority needed to regulate all paid tax preparers to bolster competency and ethical conduct. Focusing more narrowly on information reporting, the Plan is intended to promote greater transparency to the IRS regarding potential taxpayer income, especially amounts received by sole proprietorships, partnerships, and S corporations.
Expanded Reporting by Financial Institutions and PSPs
The Plan proposes to leverage existing information return requirements imposed on financial institutions (Form 1099-INT) and financial account information possessed by financial institutions to significantly expand the reporting of gross receipts and disbursements within taxpayer accounts. The agenda suggests that Treasury and the Administration believe that IRS enforcement would be better targeted by knowing the level of financial account activity occurring in personal and business accounts, particularly those accounts held by taxpayers at the upper tiers of the income distribution. Some commentators have speculated that taxpayers at the upper tiers of the income scale may be required to provide the IRS with a reconciliation of gross inflows reported for their financial accounts as an attachment to their federal income tax returns.
To prevent taxpayers from shifting funds to payment service providers or PSPs to avoid the proposed information reporting requirements on financial institutions, the agenda states that the proposed rules requiring the reporting of account gross inflows and outflows will also apply to PSPs. The agenda contemplates that proposed legislation will provide Treasury with great latitude in rulemaking—such as authority to set de minimis thresholds—to afford the IRS with significant flexibility in requiring reporting that facilitates the Government’s enforcement efforts. However, the agenda does not seem to contemplate exemptions for classes of accountholders, such as corporations, that are exempt from many existing tax reporting requirements.
Compliance Challenges Regarding Virtual Currencies
The agenda expresses concern regarding compliance challenges regarding virtual currencies and states that “cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.” Treasury anticipates significant growth in cryptocurrency transactions over the next decade, and the agenda states that cryptocurrencies, cryptoasset exchange accounts, and payment service accounts that accept cryptocurrencies will be included in the new reporting requirements applicable to financial institutions. Further, it is anticipated that Form 8300 reporting under section 6050I will be expanded to require reporting by businesses that receive cryptoassets with a fair market value exceeding $10,000. It is noteworthy that the OECD is also actively considering strategies to address tax compliance and emerging policy issues related to virtual currencies.
Any new reporting requirements typically create significant costs for those required to file additional returns. For example, the adoption of new reporting requirements under sections 6050W (payment card and third-party network reporting), 6055 (reporting of health insurance coverage), 6056 (employer reporting on health insurance coverage), and 6050Y (reporting on certain life insurance contracts) over the last decade all required the implementation of new systems and new procedures. Financial institutions are already subject to many of the most exacting reporting requirements, and new requirements may result in significant pushback. It remains to be seen whether Congress will adopt the new requirements as proposed.