President Biden’s American Families Plan includes provisions that would expand Internal Revenue Service oversight of tax preparers, expand funding for tax audits and require banks to share more account information.
The $1.8 trillion plan, which Biden announced last week during an address to a joint session of Congress, would also raise the top income tax rate to 39.6 percent for those earning over $450,000, and eliminate the lower capital gains rate for households earning under $1 million. The plan would also curb the tax break of using a step up in basis to lower the tax rate for inherited assets for capital gains over $1 million, or $2.5 million for couples when combined with existing real estate exemptions, as well as the carried interest tax break for hedge fund and private equity firm managers. In turn, the plan would fund a host of benefits for families, including making permanent the expansion of the Child Tax Credit, the Child and Dependent Care Tax Credit, the Earned Income Tax Credit, the Premium Tax Credit, along with funding for child care, college education, universal pre-K education, paid leave, nutrition programs and more.
The provision for giving the IRS the authority to regulate paid tax preparers has garnered less attention, but it fits in with a long-term goal backed by some of the leading Democrats in Congress. “Tax returns prepared by certain types of preparers have high error rates,” said a fact sheet from the Biden administration. “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. The President is calling on Congress to pass bipartisan legislation that will give the IRS that authority.”
During the Obama administration, the IRS began rolling out a program to require registration, testing and continuing education of tax preparers known as the Registered Tax Return Preparer program, or RTRP. But after a lawsuit filed by a group of independent tax preparers in the case of Loving v. IRS, a federal judge invalidated the program in 2013, ruling that the IRS lacked the statutory authority to regulate preparers. The IRS could continue to register tax preparers with Preparer Tax Identification Numbers, or PTINs. After the IRS lost an appeal in the case, it unveiled a voluntary program in 2014 for continuing education and testing known as the Annual Filing Season Program. CPAs, Enrolled Agents and attorneys are regulated separately by the American Institute of CPAs, state boards of accountancy, the National Association of Enrolled Agents and state bar associations. But regulation of unenrolled tax preparers has been a longstanding goal of the IRS, Senate Finance Committee chairman Ron Wyden, D-Oregon, and other lawmakers.
Last week, the Treasury Department expressed its desire for more regulation of tax preparers. “Taxpayers often make use of unregulated tax preparers who lack the ability to provide accurate tax assistance,” said the Treasury in a news release. “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’).”
The Treasury and the American Rescue Plan also call for increasing the IRS’s budget for conducting audits to curb tax evasion and shrink the estimated $1 trillion tax gap. “Altogether, 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,” said the Treasury. “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.”
Another part of the plan for curbing tax evasion would require banks to report more on the account flows of high-income individuals.
“The President’s proposal would change the game — by making sure the wealthiest Americans play by the same set of rules as all other Americans,” said the fact sheet. “It 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. It would also increase investment in the IRS, while ensuring that the additional resources go toward enforcement against those with the highest incomes, rather than Americans with actual income less than $400,000. Additional resources would focus on large corporations, businesses, and estates, and higher-income individuals. Altogether, this plan would raise $700 billion over 10 years.”
The Treasury provided more of an explanation for this part of the plan. “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,” said the Treasury. “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.”
At this stage, these are all merely proposals, and the Biden administration is negotiating the details of various provisions with Democrats and Republicans to try to win support in a narrowly divided Congress.
“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,” wrote Ed Zollars, a partner at Thomas, Zollars & Lynch, in his Current Federal Tax Developments blog for Kaplan Financial Education. “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. While this does not mean we should ignore the proposals, it seems likely that time spent on understanding the nuances of a number of the items will turn out to be as valuable as time spent working out the details of the border adjusted tax that was a key proposal late in 2016, just as Republicans took control of the Presidency and both chambers of Congress. And right now we don’t have any bill text upon which you can even attempt to understand such nuances.”