The proposal is designed to help find people who are lying on their tax form about how much they make. Since sole proprietors or owners of pass-through businesses have to use banks to receive and make payments, it makes sense to put the onus on banks to tell the IRS how much money flows through those accounts. A reporting requirement like this levels the playing field between employees and business owners with respect to paying their legally required share of taxes.
Conservatives have resisted earlier proposals, arguing that it would amount to the government snooping on bank accounts. But they should support this approach for two reasons.
First, it is simply a means of enforcing the law. This isn’t about exposing sophisticated investors who are using lawyers and accountants to legally exploit loopholes in tax law. It is about catching those who are simply breaking the law by not telling the IRS how much they make. There’s no conservative rationale for encouraging rampant lawbreaking.
Second, this provision weakens the rationale to raise marginal tax rates. Tax rate hikes are designed to raise revenue, but they can also harm the economy by depressing incentives to work or invest. If the government can get the money it wants by enforcing the current tax laws more efficiently, it won’t have the same justification to raise rates on everyone. Enforcing current law can provide new money for the government without producing the economic distortions that rate hikes can produce.
Many of the arguments against the proposal are exaggerated or simply wrong. The proposal would not require reporting of every bank transaction; the IRS would not be told how much you spend for your mortgage or on pizza. It would not expose individual financial information to public view, and it’s highly unlikely the information that would be reported will be selectively leaked for political reasons. Nor would the requirement be unduly burdensome on banks. As Charles Rossotti, a former IRS commissioner under Presidents Bill Clinton and George W. Bush, Fred Forman, a former associate commissioner for business systems modernization under George W. Bush, and Fred Goldberg, a former IRS commissioner under George H.W. Bush explained, banks already report a lot of information to the IRS. Providing a new form with two new lines — money in and money out — won’t be difficult to implement.
The new proposal also corrects what the administration had previously sought. Its original plan called for banks to report information on any account with withdrawals or deposits of $600 or more. That’s too low to be justified as a means of catching large tax cheats. The earlier initiative also did not exclude wage-related inflows. People who direct deposit their paychecks already have that amount reported via their W-2 statements. There’s no reason to require a second step that effectively reports the same income, which could have led to unnecessary audits of average individuals.
Conservatives have every reason to worry about IRS malfeasance. They should use this proposal as a means to attach provisions that further protect targets of audits from unreasonable or burdensome requests. Perhaps they can dedicate some of the additional funding that the IRS wants to reimbursing ordinary taxpayers for the cost they bear when complying with an audit. Certain audit expenses are already recoverable, and the IRS also helps fund clinics that represent low-income taxpayers dealing with an audit. Extending those principles so that small businesses or non-wealthy wage earners can afford competent legal counsel when audited would do more to limit genuine problems than opposing this reporting requirement.
Conservatives believe in the rule of law and support low tax rates on a broad tax base. Backing the revised IRS reporting proposal advances both goals.