Recently, the U.S. Department of the Treasury released their Tax Compliance Agenda for The American Families Plan (the "Report," and the American Families Plan the "Plan").
Under the Agenda, the Internal Revenue Service's (the "Service") budget will be increased by approximately $80 billion over the next decade in order to increase the Service's resources and decrease the current tax gap. The tax gap, the difference between taxes owed to the government and taxes paid, totaled approximately $600 billion in 2019 and amounts to nearly 3% GDP on an annualized basis. The $80 billion will be used to increase and train the Service's workforce and modernize the IT systems employed by the Service, which were implemented in the 1960s. The plan also calls for a new third-party reporting regime that will assist in cross-checking tax returns and increase voluntary compliance.
The Report indicates that the tax gap is due primarily to high-income tax taxpayers who have sophisticated accountants and tax preparers that can help shield income by utilizing various complex business structures, moving their income offshore, or moving their assets into virtual currencies. Overall, the Plan is meant to decrease the tax gap by 10% over the next decade.
The main elements of the Plan include (1) increasing the resources of the Service to pursue noncompliant taxpayers and better serve the vast majority who are fully compliant, (2) leveraging information that financial institutions already collect to shed light on those taxpayers who misreport income derived from tiered structures utilized by pass-through entities, virtual currencies, and offshore accounts, (3) overhauling antiquated technology to help the Service leverage 21st century data analytic tools, and (4) regulating paid tax preparers and increasing penalties for those who intentionally commit fraud.
More specifically, the Plan will seek to use information that financial institutions already collect in order to obtain more third-party information reports. These third-party information reports will be similar to Form 1099's but will allow the Service to see through opaque categories of income and will also result in more voluntary compliance because the taxpayers know financial institutions are already reporting these income streams and transactions to the Service. Not only will traditional accounts be subject to these additional reporting requirements, but virtual currencies will also be subject to the information reporting requirements. The Service intends to apply the same rules to cryptocurrencies and crypto asset exchange accounts and payment service accounts that accept cryptocurrencies. Without expanding the reporting regime to these types of virtual transactions and currencies, the Report predicts that businesses would shift their dealings to such transactions and currencies thereby decreasing the value of the proposed financial reporting regime.
Concurrently, the Plan will seek to update the Service's current technology system. The current system was created in the 1960's and uses a programing language that is no longer in use. Updates have been made in a patchwork style that subjects the system to cyberattacks and limits the ability to process, organize and report on the information received by the Service. A new system will allow the Service to cross-check information reports more efficiently, provide real-time information to taxpayers, and allow agents to identify taxpayers that should be audited.
BROWN RUDNICK INSIGHT
It is unclear if the increased funding will yield proportionate collections. For example, when pressed on the issue, IRS Commissioner Charles Rettig told the Senate Appropriations Financial Services and General Government Subcommittee that the Service could not commit to collecting more than 20 percent of the current tax gap even if fully funded per the Plan.1 Nevertheless, it is clear that the Service continues to identify crypto assets as a high return examination target. That is, increased technology and proposed reporting requirements should be able to catch transactions that are currently avoiding examination. This focus on crypto assets is consistent with the Service's existing focus on identifying crypto assets, which is already apparent by the question on page 1 of the 2020 Form 10402 and the Service's recent issuance of a "John Doe" summons to the cryptocurrency exchange Payward Ventures Inc. d/b/a/ Kraken ("Kraken") to aid in assessing Kraken users' tax liabilities.
As a result, we expect more tax examinations and investigations tied to crypto assets as the Service ramps up its efforts (be it by $80 billion or some smaller amount).
Footnotes
- 1 Internal Revenue Service: Narrowing the Tax Gap and Improving
Taxpayer Services Before the Subcomm. on Financial Services and
General Government of the S. Appropriations Comm., 117th Cong.
(2012) (Statement of Charles P. Rettig, Commissioner, Internal
Revenue Service). See the link: https://www.appropriations.senate.gov/hearings/internal-revenue-service-narrowing-the-tax-gap-and-improving-taxpayer-services.
- 2 In 2019, the question about ownership of virtual currencies was on a schedule that not every taxpayer filed. The movement of this question to the top of page 1 is indicative of its importance in tax compliance.
Originally published 05/24/2021
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