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After President Joseph R. Biden proposed the $1.8 trillion American Families Plan (AFP) during his first address to a joint session of Congress, much attention went to the sections on creating jobs, increasing government benefits to children and families, and increasing the top income tax rate to 39.6 percent. There has been less discussion of the AFP’s content regarding tax preparation, tax audits, and sharing of individuals’ bank account information, but if implemented, the plan would profoundly affect these areas.
The AFP contains significant changes to the tax code. In addition to increasing the tax rate for those at the top of the income ladder, households with income exceeding $1 million would also pay a higher capital gains rate. Those inheriting assets with capital gains over $1 million ($2.5 million for couples when combined with existing real estate exemptions) would no longer be able to use a step-up basis to soften the tax blow, and hedge fund and private equity firm managers would no longer be able to utilize a carried interest tax break. The AFP proposes using these changes to offset government spending increases in universal pre-K education, childcare, college education, nutrition programs, and paid leave. The AFP would also make permanent the now-temporary expansions of the Child Tax Credit, the Child and Dependent Care Tax Credit, the Earned Income Tax Credit, and the Premium Tax Credit.
In addition to these changes, the AFP also provides the Department of Treasury and the IRS with increased authority over paid tax preparers, expanded funding for tax audits, and adds requirements for banks to more readily share relevant bank account information with the government.
Oversight of tax preparers has long been an area of interest for lawmakers. The Registered Tax Return Preparer program, first proposed by the IRS under the Obama administration, required that tax preparers register and submit to testing and continuing education requirements. After a federal judge invalidated the program, ruling that the IRS lacked the necessary statutory authority to implement the program, lawmakers favoring increased oversight have been pursuing legislative action to increase IRS authorities. A fact sheet released by the Biden administration in support of increased IRS oversight spells out the goals of the changes. “Tax returns prepared by certain types of preparers have high error rates. These preparers charge taxpayers large fees while exposing them to costly audits. As preparers play a crucial role in tax administration and will be key to helping many taxpayers claim the newly expanded credits, IRS oversight of tax preparers is needed.”[1]
A Treasury Department news release also emphasized the need for oversight. “Taxpayers often make use of unregulated tax preparers who lack the ability to provide accurate tax assistance. These preparers submit more tax returns than all other preparers combined, and they make costly mistakes that subject their customers to painful audits, sometimes even intentionally defrauding taxpayers for their own benefit. The president’s plan calls for giving the IRS the legal authority to implement safeguards in the tax preparation industry. It also includes stiffer penalties for unscrupulous preparers who fail to identify themselves on tax returns and defraud taxpayers (so-called ‘ghost preparers’).”[2]
The AFP’s emphasis on an increased IRS budget for conducting taxpayer audits was driven by Treasury statements claiming tax evasion leads to tax revenue shortfalls of roughly $1 trillion. According to the Department, “The proposal directs roughly $80 billion to the IRS over a decade to fund an array of priorities — including overhauling technology to improve enforcement efforts, which is more effectively implemented with the assurance of a consistent funding stream. This investment will also facilitate the IRS hiring and training auditors to focus on complex investigations of large corporations, partnerships, and global high-wealth individuals. The president’s proposal directs that additional resources go toward enforcement against those with the highest incomes, rather than Americans with actual income of less than $400,000.”[3]
Because tax evasion takes many forms, the AFP hopes to address it through not only increased auditing capabilities but also by introducing requirements for banks to report account flows of high-income individuals. According to the administration’s fact sheet, the AFP “would require financial institutions to report information on account flows so that earnings from investments and business activity are subject to reporting more like wages already are. Additional resources would focus on large corporations, businesses, and estates, and higher-income individuals. Altogether, this plan would raise $700 billion over 10 years.”[4]
The Treasury adds that “GAO and IRS research confirm that providing the IRS a mechanism for cross-checking the accuracy of such tax filings is a proven way to improve compliance. This reform aims to provide the IRS information on account flows so that it has a lens into investment and business activity — similar to the information provided on income streams such as wage, pension, and unemployment income. Importantly, this proposal provides additional information to the IRS without any increased burden for taxpayers. Instead, it leverages the information that financial institutions already know about account holders, simply requiring that they add to their regular, annual reports information about aggregate account outflows and inflows. Providing the IRS this information will help improve audit selection so it can better target its enforcement activity on the most suspect evaders, avoiding unnecessary (and costly) audits of ordinary taxpayers.”[5]
The AFP will likely see significant changes between the administration’s initial proposal and the version that may eventually be voted on by Congress. Ed Zollars, a partner at Thomas, Zollars & Lynch, warned in his Current Federal Tax Developments blog for Kaplan Financial Education that it is too early to react one way or another to what is in the plan. “It’s easy to overreact to such proposals, as many parties forget (or have a vested interest in ignoring) that this remains merely a proposal at this point in time. It’s not clear how much congressional support would exist for passing this proposal 'as is' and history suggests that there will be modifications, many likely significant, made to any bill if it becomes law — another thing that is far from a certainty.”[6]
Sources & Disclosures:
[1] Fact Sheet: The American Families Plan, WhiteHouse.gov, April 21, 2021, available at https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/
[2] Testimony of Deputy Assistant Secretary for Tax Policy Mark J. Mazur to the Subcommittee on Oversight and Subcommittee on Select Revenue Measures, U.S. House of Representatives, Treasury.gov, June 10, 2021, available at https://home.treasury.gov/news/press-releases/jy0220
[3] Written Testimony of Charles P. Rettig, Commissioner, Internal Revenue Service, Before the Senate Appropriations Committee, Subcommittee on Financial Services and General Government on IRS Operations, IRS.gov, May 19, 2021, available at https://www.irs.gov/newsroom/written-testimony-of-charles-p-rettig-commissioner-internal-revenue-service-before-the-senate-appropriations-committee-subcommittee-on-financial-services-and-general-government-on-irs-operations
[4] Fact Sheet: The American Families Plan, WhiteHouse.gov, April 21, 2021, available at https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/
[5] Investing in the IRS and Improving Tax Compliance, Treasury.gov, April 28, 2021, available at https://home.treasury.gov/news/press-releases/jy0150
[6] Fact Sheet Issued for Proposals for the America Families Plan, Ed Zollars, Current Federal Tax Developments Blog, May 1, 2021, available at https://www.currentfederaltaxdevelopments.com/blog/2021/5/1/fact-sheet-issued-for-proposals-for-the-america-families-plan
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