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IRS chief tells Elizabeth Warren: More transparent bank data can fight tax evasion

  • IRS chief Charles Rettig told Sen. Elizabeth Warren that relying on banks to report on their customers' accounts could help cut the tax gap.
  • Rettig, a Trump administration holdover, touted a provision in the American Families Plan that would require banks to report on their customers' withdrawals and deposits.
  • The IRS estimates that for every 1% improvement in voluntary tax compliance, federal annual revenues could increase by about $30 billion per year.

A man walks past the U.S. Capitol building in Washington, June 25, 2020.Al Drago | Reuters

The head of the IRS believes more rigorous disclosures from the nation's banks could help fix a yawning tax gap and recoup billions in owed revenues.

In a letter viewed by CNBC, IRS Commissioner Charles Rettig told Sen. Elizabeth Warren, D-Mass., that relying on banks to report basic information about their customers' deposits and withdrawals could put a big dent in annual tax evasion.

A source provided CNBC access to the letter, which is expected to be released Thursday. The source disclosed its contents on condition of anonymity.

The IRS chief told Warren in Friday's letter that years of budget cuts have left the agency unable to prosecute those who fail to pay their fair share in federal taxes.

"Every measure that is important to effective tax administration has suffered tremendously," Rettig wrote, referring to years of budget reductions.

However, President Joe Biden's American Families Plan and the bipartisan infrastructure deal "would result in significant volumes of new data regarding financial transactions," said Rettig, a Trump administration holdover. "The new data will provide the IRS with a lens into otherwise opaque sources of income with historically lower levels of reporting accuracy."

Specifically, Rettig touted one provision in the American Families Plan that seeks to shrink the tax gap by requiring banks to report on their customers' withdrawals and deposits instead of relying on the taxpayers themselves. The tax gap is the difference between taxes paid and taxes owed by law.

Rettig noted that for every 1% improvement in tax compliance, federal annual revenues are projected to increase by about $30 billion per year. Overall tax compliance — defined as, voluntary, accurate and on time — is estimated by the IRS to fall in the 82% to 84% range.

Sens. Bernie Sanders, I-Vt., and Sheldon Whitehouse, D-R.I., joined Warren last month in requesting that the IRS and its commissioner offer a detailed report on how better enforcement could help generate billions for the federal government in owed taxes.

"This new information from the IRS makes clear that unless we significantly increase IRS funding, wealthy tax cheats and big corporations will be able to continue to avoid paying their fair share to the tune of billions of dollars per year while everyone else suffers," Warren said of Rettig's reply letter. "This is why congressional leadership must include in the budget reconciliation package significant, multiyear funding for the IRS to boost enforcement and bring in billions more in revenue each year."

The IRS analysis "makes it clear we need new reporting requirements in order to improve tax compliance among the wealthiest Americans, and to reduce the burden for honest taxpayers," she added.

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Central to Rettig's argument is a simple behavioral problem: Few people enjoy paying income taxes.

That statement is likely even more pertinent for Americans with annual incomes greater than $1 million. Those high-income earners are required to pay a greater percentage of their income to the IRS, and therefore have a greater incentive to find ways to skirt the taxman.

The banking industry, which would bear the burden of sending the U.S. government more data, protested the provision in May.

In their springtime letter, the American Bankers Association, the Bank Policy Institute, the Consumer Bankers Association and others argued that the "new reporting requirements for financial institutions would impose cost and complexity that are not justified by the potential, and highly uncertain, benefits."

"Furthermore," the trade groups added, "we believe additional reporting requirements guided by subjective criteria have privacy and fairness implications and the potential to put financial institutions in an untenable position with their account holders."

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