This Week in AML
The Biden Administration and the Treasury Department have unveiled a proposal to improve tax fairness and compliance. The proposal seeks to enhance tax reporting by authorizing the IRS to require financial institutions to report two additional items of information on its customers: the total amount of funds deposited into the account and the total amount withdrawn over the course of a year. John and Elliot discuss the implications of the proposal and its possible impact on financial service company’s compliance activities.
Aiming for Improving Tax Fairness TRANSCRIPT
John Byrne: Hey Elliot, I'm doing fine yourself.
Elliot Berman: I'm well, too. Thanks.
So, as part of a whole bunch of different pieces of legislation, I saw this week that an early preliminary proposal by the White House related to additional authority for the IRS to have financial services companies provide additional reporting on their customers has been refined.
So this is all in the realm of tax fairness. So did you see that release?
John Byrne: Right. Yeah, I did. We've talked about tax evasion, tax avoidance. Obviously, this has been a major problem in the US for many years, and any time you actually attempt to see is there a possible solution, people sort of go in their corners. I'm not suggesting that our friends in the financial service industry should have more obligations, but I do think that the way it was recast by Secretary Yellen is important. So at least people can have the facts. What exactly are they arguing for?
So I think, you know, they talk about closing the tax gap. They make the comment, which is factual, that those of us that are salaried employees, there's really not many problems with tax evasion with people that get their funding that way, because of reporting.
It becomes much more difficult for those that get revenue from other sources because there's not always a third party to do reporting. So there definitely is an issue that needs to be addressed, but also, you want to make sure that it's not simply just another add-on to our former industry of obligations.
So you want at least to have a debate based on what is actually being proposed. So I thought a lot of what's been said in the past week, we can focus on, and obviously, the policymakers will make a decision.
Elliot Berman: Agreed. As you mentioned, [the] Treasury published a fact sheet that followed the actual legislative proposal that's kicking around Congress.
One of the things that caught my eye was when you sweep away a lot of the rhetoric and the back and forth and things like that. There was a spot, and now, of course, I can't find it cause I want to talk about it. But, that there are only two additional pieces of information.
John Byrne: Right.
Elliot Berman: They're going to require or proposing to require. And it's actually authorizing the IRS to have the ability to make a regulation that would cause this to happen. But the two numbers are the total amount of funds deposited into the account for the year of reporting and the amount withdrawn over the course of a year.
And you know, again, the fact sheet indicates that the purpose of this would be to allow the IRS to identify accounts where the numbers seemed worthy of further inquiry.
John Byrne: Right. And, look, you know, they make a comment, and I know estimates can be sort of shaded depending on how you do your numbers, but they've made the tax [inaudible] among the top 1% of taxpayers is over 160 billion a year, that's real money. And as you said, this financial reporting is added to what's already, you know, the financial institutions already provide information. But none of this will be on individual transactions, as you said, but it will be on what we would consider to be sort of abnormal activity. Right?
Or at least potential abnormal activity, and the IRS, then with their investigators can take a look at it and see sort of what's up.
Elliot Berman: Correct. Yeah, I think $160 billion is real money. I do want to go back actually to the headline that was, or the top title that was given to this fact sheet, by Treasury, because their view that they're casting it, and I feel like it's not an unfair casting. Tax compliance proposals will improve tax fairness while protecting taxpayer privacy and the taxpayer and this component is what you referred to. Which, you know, there are lots of people who have jobs where they have W2 income is their principal cashflow source.
And those folks are paying taxes because it's automatically withheld from their paychecks. Those folks are paying, you know, or at least are participating in some way and paying their fair share. Folks who have other approaches to income, whether it's investments or whatever it might be, should participate as well. Again, this is my opinion. That's a lot of, kind of what makes a community work.
John Byrne: Right.
And, you know, we've heard rumblings for years from law enforcement and prosecutors that there needs to be money laundering predicate for tax evasion, which there currently is not. And obviously, even FATF proposes or advocates and encourages that if this were to be put into place, perhaps that does it become, you know, something that has to occur. Maybe you don't need to make it a predicate if, according to the way Treasury is looking at it.
If they can, have their enforcement agents look at tax evasion by sophisticated upper-income taxpayers versus the day-to-day workforce. You get rid of costly audits, and you're targeting places where, if you're successful, there are additional funds, and perhaps you don't need to have additional confusion that could occur if you make tax evasion and money laundering predicate. I'm not saying that that shouldn't happen, but this could be a potential, a huge step that might make that not required.
Elliot Berman: And by virtue of having this extra reporting, it may encourage more folks in those, more sophisticated brackets, to be more forthcoming and rather than seeing if they can avoid paying the tax, pay the tax.
John Byrne: Right.
So I think folks should take a look at the fact sheet it's on Treasury's website. Also, the statement by the Treasury Secretary. During testimony coming up in the next couple of weeks by the Treasury. They'll continue to get asked about this.
Elliot Berman: Agreed. Lots of comments [are] flying around about this. So, go to the source and get the facts.
So, John, I'll start with the shameless plugs. If you like this, we do it every week and, we'd love to have you join us every week. You can find us on Spotify, Apple Podcasts, or wherever you find your podcasts. And John, we've got a webinar coming up. Don't we?
John Byrne: Four o'clock [a] different time for us, Eastern time. On the critical partnership between compliance and internal audit.
Elliot Berman: Yeah. You can go to our website and register, and you'll get the link to join the live stream—four o'clock Eastern next Thursday. John, have a good weekend, and I will talk to you next week.
John Byrne: Take care of Elliot. Stay safe.
Elliot Berman: You too.