A tax gap difference between what the U.S. government is supposed to be collecting and what people actually pay is a result of people calculating their own tax instead of the government calculating it for them. Or people simply don’t tell the truth, or they are not able to calculate their income.
The Treasury Department said that the primary reason for the tax gap is because third parties are not reporting everything about a person’s income and are just depending on the honor system which is not reliable all the time.
With this, President Joe Biden has announced several proposals to close the tax gap and one of which is requiring banks to report all their customers’ total deposits and withdrawals in their accounts.
The proposal appears to be fair since W-2 employees’ income is reported to the IRS. Business owners also have a form 1099 which reports nonemployee income to the IRS, but not everyone is mandated to submit 1099 which means bank information will possibly reveal what businesses are made of compared to what they report on their tax returns.
But banks oppose this proposal because it will require costs and may cause a strain in the relationships they have with existing clients who value their privacy. Banks that are smaller as well as credit unions that do not have the technical capability and financial resources to comply may result in closure.
Currently, banks are required to report certain transactions to the government. Generally, they have to report all transactions exceeding $10,000. They also must submit “suspicious activity reports” if they consider a customer doing illegal activities.
The Biden Administration and the Treasury Department assures the public that they are focused on high-end invasion since the idea of the government looking around in people’s bank account is not going to sound great.
They also said that audit rates will not increase for people earning less than $400,000. Although they did not mention is that the bank account sweeps will only affect the rich people. Annual reporting will not be mandated for accounts below a low de minimis grow flow threshold of under $600.
Most of the people’s unemployment payments go beyond $600 so it is safe to believe that almost everyone’s bank account activities must be reported, and you are not spared because you have a full-time W-2 job. The government will also want to know about all your side hustle.
This proposal is only focused on total inflows and outflows from an account and not your certain transactions like OnlyFans subscriptions. So, no need to worry.
This government suggestion might work. Some people will not be honest about reporting fake numbers if the IRS can see their bank transactions but, not all deposit made is a taxable income.
Some deposits are loans, which have been a lot recently because of the increase in the SBA’s Economic Injury Disaster Loans and the Paycheck Protection Program. Others could also be transmitted from one account to another. Although some of these can be explained, others may not or auditors may not believe them which may lead to protracted dispute and paying unnecessary taxes on non-income.
State tax agencies are likely to have access to this information through their information-sharing programs with the IRS. Unless states are barred from accessing information of such, this could prompt a rise in income tax audits by state tax agencies who are not tied by Biden’s promise of not harassing the middle class.
The president’s plan to push banks to reveal their customers’ deposits and withdrawal transactions are being thrown to catch and discourage wealthy tax cheats although the $600 minimum flow threshold might possibly end up in bank accounts being asked to disclose.
The proposal may result in rich tax evaders getting caught but it could also result in a regular American getting a surprise letter from the IRS because of a loan he received from his parents. Does this proposal have to make every American remember and document all bank transactions they do just for the purpose of tax equality?