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American Families Plan


Yardley CPA

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This has the potential to turn into a record keeping / reporting nightmare for banks and other financial institutions.  I'm sure it will impact us as tax preparers also.  Time will tell.

Under Biden Plan, The IRS Would Know A Lot More About Your Bank Accounts  (Forbes.com)

President Biden announced the American Families Plan today, which is designed to “grow the middle class and expand benefits of economic growth to all Americans.” The American Families Plan includes a lot to like, no matter what side of the aisle you are on. By any measure, the amount of benefits being proposed is staggering, which begs the question, how will we pay for all of this? By increasing IRS enforcement, by increasing reporting obligations for financial institutions, and by raising taxes on the wealthy. Each aspect of this plan is worthy of its own column. This column will focus what a senior administration official called one of the “significant steps” designed to make “sure that [ ] taxpayers are paying the taxes they already owe”: increased reporting obligations for financial institutions.

Simply put, the American Families Plan calls for banks and other financial institutions to report more than just a taxpayer’s interest earned, capital gains and losses. Banks and other financial institutions would also be required to report “aggregate account outflows and inflows.” In other words, the IRS will know about all of your bank accounts, whether you earned income on that account or not, how much is in the account in a given year, and how much was transferred in and out of the account. It is unclear how this would work, but what is clear is that this new reporting obligation will create a massive compliance effort on the part of financial institutions, and eliminate a massive blindspot that the IRS is currently enduring.

As things stand today, most taxpayers don’t have an obligation to report how much money they have in their bank accounts, how much they deposited, or how much they withdrew. Self-employed taxpayers who - like all Americans - self-report their income and deductions to the IRS are on the honor system. W-2 Wage earners, on the other hand, have their amount of wages reported to the IRS on their behalf. The IRS’s lack of information about the balance of the business bank account, how much was deposited, and how much was withdrawn allows the self-employed taxpayer to lie (or make an honest mistake) about gross receipts or gross revenue. For some self-employed taxpayers, this temptation is hard to resist. Cheating on taxes by taking outlandish deductions is likely to end up in an IRS audit, but under-reporting revenue is harder to track or identify. By requiring banks to report highest balances and aggregate deposits and withdrawals, the American Families Plan will effectively close off the option of underreporting gross receipts or revenues for businesses and self-employed taxpayers.

It may create problems, however, that should be considered and addressed as this plan works its way through Congress. For example, consider a young couple saving up to buy a home. All savings are put into the “dream home” savings account. Then, when it comes time to make the down payment, the $50,000 dream home savings goes into the regular checking account, which is then wired to the seller’s escrow account. Buying a home is not a taxable event (at least for federal income tax), selling one is. Will the IRS receive information from the financial institutions that leads to an audit?

Conversely, say the young couple receives the down payment as a gift from their parents. If the parents gifted $50,000 to the adult children to make a down payment, that must be reported on a gift tax return, even though no gift tax is due. This type of gift is frequently made, and in my practice as a tax controversy lawyer, rarely reported as it should be. The increased financial reporting obligation would likely increase compliance with gift tax reporting rules.

If the proposal to require financial institutions to increase reporting to include account balances, inflows and outflows, is passed there is no question it will increase taxes collected. Both self-reporting and audit outcomes will likely be improved. However, defending against an IRS exam is stressful and can be costly. The Biden administration and Congress should work together to ensure that taxpayers who simply move funds between accounts are not audited solely as a result of the proposed increased financial reporting obligations for financial institutions.

 

 

 

 

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I have clients that like to pay me via PayPal and Venmo plus credit cards I process via Intuit. I would receive Forms 1099-K from all three of those. The Intuit payments land in my biz checking account, and I move all the Venmo and most of the PayPal to my biz checking account.

Under Biden, my biz checking account will issue me Form 1099-whatever on those transfers. The same income will get reported twice.

My disbursements from PayPal and from my biz CC and from my biz checking account will NOT be reported twice. My net profit will look waaay too high!

I can't imagine the time it will take to argue my own situation with the IRS, let alone argue for all my clients!

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Of course it's easy -- if it fits the rubric the IRS auditors are given, which will be newly-written to work with the new bank reporting forms. But it will be very time-consuming for me and for all my small biz clients. Clients won't feel it's their fault (it isn't) and expect NOT to pay me.

I'm spending hours each day corresponding with clients waiting on refunds and with clients receiving levy letters now, because the IRS hasn't processed their online payments yet. Clients are angry. At me. They know they paid, so it must be my fault. Even if they want to rant at the IRS instead of me, the IRS doesn't answer their phones or faxes or process letters. The IRS just holds onto their refunds or keeps sending ever more threatening letters. My clients' rants should be directed at Congress, but they know they won't get any action there, either

This is just one more thing that will go wrong next tax season (if this one ever ends). One more thing we have to clean up after Congress' new idea.

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On 9/25/2021 at 10:56 AM, Lion EA said:

just one more thing that will go wrong next tax season (if this one ever ends)

Extending the use of your most-wonderful appellation from earlier, we are now in Q7 of 2020, almost to Q8.  

Can we all go hide under our desks now, and stay there till this is all over?  Please?

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  • 2 weeks later...

The Wall Street Journals position on this proposal:

 

OPINION 

 REVIEW & OUTLOOK

The IRS Wants to Look at Your Bank Account

Its quest for missing revenue would threaten taxpayer privacy.

By 

The Editorial Board

Oct. 4, 2021 6:43 pm ET

On your next trip to the ATM, imagine that Uncle Sam is looking over your shoulder. As if your annual tax filing wasn’t invasive enough, the Biden Administration would like a look at your checking account.

Charles Rettig, commissioner of the Internal Revenue Service, wants banks to report annual cash flows for ordinary account holders. Treasury Secretary Janet Yellen is promoting the plan, and the House Ways and Means Committee is debating whether to include this mandate in the Democrats’ $3.5 trillion spending bill.

Ms. Yellen says the reporting will help to catch wealthy tax dodgers. In a recent letter to the committee she said the plan would reveal “opaque income streams that disproportionately accrue to the top.” Treasury and congressional Democrats hope taxpayers will report income more accurately if they know the feds have their account information.

Yet the IRS plans to review every account above a $600 balance, or with more than $600 of transactions in a year. So every American with a job could get looked over. A group of 41 industry groups recently warned congressional leaders that the plan “is not remotely targeted” to detect major tax avoidance.

It’s also a privacy breach waiting to happen. Not long ago the confidential tax records of Jeff Bezos, Mike Bloomberg and other wealthy Americans were exposed by ProPublica. Whoever leaked or hacked those records committed a crime, but the IRS has revealed nothing from its promised investigation. Adding bank account info to the IRS trove would risk the disclosure of savings and spending information of political adversaries in the same way.

Twenty-three state treasurers and auditors signed a letter last month opposing the plan, calling it “one of the largest infringements of data privacy in our nation’s history.” Nebraska Treasurer John Murante says his state won’t comply if the reporting rule takes effect.

Casting a wide net over personal finances is a longstanding aim for Democrats and the political left. President Obama in 2009 formed a panel to discuss closing the “tax gap,” arguing that widespread underreporting of income costs the government hundreds of billions a year.

The House continues to debate the bank account proposal, but the spending bill already includes $80 billion for the IRS to hire thousands of new staffers. Treasury estimates that these changes would collect $700 billion in revenue over the coming decade. But Rep. Kevin Brady, the top Republican on Ways and Means, points out that the tax gap is murkier than Democrats admit.

“The IRS will admit their data is seven years old,” Mr. Brady told CNBC in July, noting that the agency’s estimates don’t account for the 2017 federal tax reform that limited many loopholes. “What they’re saying is give us a ton of money, let’s hire a bunch of auditors and we think this will create revenue.”

Overestimating the results of greater enforcement lets the Biden Administration attach a higher revenue number to its multi-trillion-dollar spending proposal. That’s bad enough. But the bigger threat of giving the IRS access to the details of your bank account is that politicians will eventually find a way to control how you save and spend your own money. This is a bad idea that deserves to die.

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the October 5, 2021, print edition as 'The IRS and Your Bank Account.'

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This is overkill.  When a business is audited, the first thing asked for is bank account statements, so that info is available when there is "need to know."  If they actually looked at just about all bank accounts, there would be so much data it would be impossible to mine anyway.  As for hiring more employees, we all know how badly the IRS needs them to conduct audits, answer the phone, open correspondence.  We never thought about the people who do those things until this year when there aren't enough workers to get them done and it's affecting us and our clients.

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We also know that the IRS will look at bank-to-bank transfers (such as from operating account to payroll account) as "income" going to the second account.  So they will wildly overestimate the income for anyone who transfers their own money from one account to another.  Those who put money into money market accounts to earn a bit of interest until it's needed will have to "prove" to the IRS (who won't have the personnel to process the proofs submitted) that the $5,000 was not income to their checking account, but savings transferred to pay for the end of year mortgage, utilities, plus Christmas gifts.  

It's a nightmare waiting to happen.  The only good to come from it would be if trying to process all that data melts the processors on all the IRS computers, and they go back to the Stone Age for a decade.

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