May 21, 2021
Biden Administration proposes increased information reporting
The Biden Administration has proposed a sweeping expansion of information reporting in an effort to close the tax gap, which it estimates at $584 billion for 2019 and $7 trillion over the next 10 years. The proposal, if enacted, would require financial institutions to report to the IRS gross inflows and outflows of virtually all financial accounts on Forms 1099.
The Administration first offered up the proposal weeks ago as part of a broader IRS budget and compliance plan aimed at raising revenue to help offset the cost of The American Families Plan, which focuses on "human infrastructure" and income inequality. In a report released May 20, 2021, "The American Families Plan Tax Compliance Agenda," the Administration describes the information-reporting proposal as building on the current Form 1099-INT, which reports interest payments of $10 or more in a given year. "Financial institutions would simply report additional data on the financial accounts of these existing information returns. Specifically, the annual return would report gross inflows and outflows on all business and personal accounts."
Expanding Forms 1099 and 1098 framework
This proposal would augment the current Form 1099 and Form 1098 reporting framework, which requires third parties to report income and expenses that, in theory, can be tied directly to a tax return. The scope of the proposed inflow/outflow reporting would be extended to all domestic and foreign financial institutions, including:
In addition, "[p]ayment service accounts that accept cryptocurrencies would be covered" and "businesses that receive cryptoassets with a fair market value of more than $10,000 would also be reported on," the report says.
According to the report, the new reporting requirements "would come with no additional reconciliation requirement for taxpayers" to explain which reported items do and do not represent income includable on an income tax return. The report's definition of "taxpayers" focuses on recipients of any new or modified information returns, and not on the entities that will need to issue them.
In traditional Form 1099 reporting, many types of entities, including corporations, are considered "exempt recipients," so payment to them does not require a Form 1099. On the other hand, the Administration's report says that "it is imperative to prevent business income from being shielded from reporting requirements. This is why the new Form 1099 reports would also be required from payment services providers so that businesses cannot shift out of traditional financial institutions to other kinds of platforms and avoid making their income visible to the IRS." The only exception referenced in the Administration's plan is for "low de minimis gross flow threshold" accounts, but thresholds for that exception are not suggested.
The proposal would require legislation to be implemented, so ultimately it is up to Congress, starting with the House and Senate tax writing committees, to determine the scope and details of the proposal and whether it should move forward. The report does not include legislative language, so the precise scope of the regime, including exemptions, will not be clear until it is enacted and the IRS drafts regulations. A footnote in the report says, "[t]he proposal preserves significant flexibility for the Secretary and the IRS to design the new reporting requirements in the way that will be most effective for tax compliance efforts." The report says "[t]he Administration would concurrently seek out ways to reduce any new burden on financial institutions associated with this information reporting requirement." The report also points out that there will be "pitfalls" if the requirements are not designed precisely, so it will be important to implement comprehensive rules.
While the proposal is made in the context of the President's American Families Plan, ongoing bipartisan negotiations around an infrastructure bill that could cost hundreds of billions of dollars have included similar proposals. If those negotiations are successful, and this proposal or something like it is included, legislation could move forward this summer. If, however, this proposal is not included in that legislative package, Congressional Democrats may seek to include it later this year as a revenue-raising proposal to help offset the cost of another legislative package.
The Treasury Department proposes that the reporting requirement take effect for 2023 tax years. The report's revenue estimate ($460 billion raised over 10 years), for example, assumes that the rules will be effective for calendar-year 2023 cash flows.
When the proposal becomes effective, however, is an issue that will ultimately be decided through the legislative process. If Congress decides to move forward with the proposal, it will have to decide on an effective date. Because it will take Treasury and the IRS some time to draft proposed regulations, the financial services industry will certainly need to be vigilant and vocal with feedback and comments on those proposals. If implementation of the FATCA regime is any example, even the statutory effective date could be delayed in part through regulations.