President Biden has an economic agenda and a big part of it is strengthening taxpayer compliance by increasing what must be reported to the Internal Revenue Service (IRS) about client accounts by third party financial institutions and similar entities. The President’s proposal would require information reporting on both business and personal financial accounts. The reporting regime would cover foreign financial institutions and crypto asset exchanges and custodians. The American Families Plan Tax Compliance Agenda can be read here.
Information, Information, Information
The new rules would increase what the IRS can learn about gross receipts and expenses in the customer’s account. In other words, the plan will allow the IRS to see detailed financial flows in a taxpayer’s account, thus giving more information to choose which taxpayers should be questioned about the numbers on their actual tax returns versus the flows evidenced by the reports sent to the agency.
Specifically, the annual information report would be sent by financial institutions and payment settlement entities or “PSEs” (e.g., Square) on all business and personal accounts including bank, loan, and investment accounts. There would be a carve out exception for accounts below a low de minimis gross flow threshold. Other accounts that are similarly situated to financial institution accounts would also be covered under this new reporting regime— for example, payment settlement entities would also be required to report gross receipts and gross purchases. PSEs are the organizations responsible for reporting to IRS the payments made to participating payees (a good example is PayPal). A PSE includes not only US entities but foreign ones as well.
Under the current law, third party information reporting about business income is very limited. The Biden administration believes that the “tax gap” for partnership, S-corporation, and proprietorship income (estimated at an annual amount of US$200 billion) would be stemmed if such detailed 3d party reporting was mandated. As compared to business income, more detailed 3d party reporting is provided to the IRS for individuals (such as wages, pension, and unemployment income). However, this kind of 3d party information is not provided by foreign employers of US persons living and working abroad and FATCA information from foreign financial institutions is currently limited due to hiccups in robust enforcement.
A Word on Foreign Financial Account Reporting
Department of the Treasury and the IRS have been delaying the requirement that foreign financial institutions obtain SSNs from US clients opening and maintaining overseas financial accounts. Without the SSNs the IRS cannot match information reported on the taxpayer’s return with information provided by the foreign financial institution to the IRS. Lacking such matching capability, enforcement of FATCA is greatly diminished and the proposed reporting regime of President Biden will be similarly hampered. In my experience I am seeing that some foreign financial institutions are not pushing their clients hard to get the this critical information. This is especially so in the case of dual national clients who opened their accounts prior to FATCA’s enactment, using documentation (e.g., passport) of their “other” nationality.
Posted May 21, 2021
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