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June 8, 2021

Senate Finance Committee IRS hearing focuses on tax gap

The Senate Finance Committee's June 8 hearing on the IRS Budget with Commissioner Charles Rettig included discussion about efforts to narrow the tax gap, which have intensified since the Commissioner's comments at an April 13 hearing that the difference between taxes owed and paid may have swelled to $1 trillion annually in the age of cryptocurrency. The Biden administration FY2022 budget proposed more funding for IRS enforcement and technology alongside a proposal to have financial institutions perform additional reporting on inflows and outflows from financial accounts, and Republicans at the hearing expressed concerns over the privacy aspects of the proposal.

Chairman Ron Wyden (D-OR) said his own tax gap proposal would be released soon and, in general, "We are going to move pretty quickly on these issues." In an opening statement, he raised concerns that while "more than two out of every three dollars earned by partnerships in this country go to the top one percent of earners," out of millions of partnership returns filed in 2018, only 140 were audited, meaning there's a "better chance of being struck by lightning."

In his opening statement, Ranking Member Mike Crapo (R-ID) said, "I have long been critical of big data collection activities and oppose turning banks and brokers into government tax collectors. I also have strong concerns about the proposed IRS big data requirements." During questioning, Senator Crapo asked whether the American people want their banks to act as IRS agents and report income flows. Rettig generally declined to comment but suggested it's possible that modernized systems and using information they have access to will allow some audits to be avoided.

Senator Crapo said he is an advocate of protecting the privacy of data and suggested Chairman Wyden is too. He said the proposal to increase the ability of the IRS to "violate privacy" in excess of what currently exists is of great concern and questioned how there can be assurances the information will be used appropriately and not in violation of taxpayer privacy.

Senator John Thune (R-SD) asked how policymakers can narrow the tax gap if they can't even agree on the size of it, noting disparate estimates, and what the agency is doing to improve its estimates. Commissioner Rettig noted that in 2019 IRS released an estimate of 2011–2013 data, and he found the outdated information unacceptable, in part because it didn't reflect the digital world economy, digital currency and other types of transactions, and foreign-based taxpayers doing business in the US. He said IRS has been working hard and hopes to share more updated data.

Senator Thune also expressed concern about the breadth of information proposed to be collected under the Administration's plan. He said financial account reporting of accounts with a gross flow or fair market value of $600 or more captures a tremendous number of transactions and asked whether IRS needs information that granular. Commissioner Rettig said with the 2010 enactment of FATCA, which requires that financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their US account holders, IRS didn't get funding for updating systems to use the additional reporting information. The Administration is proposing additional funding for technological investment, which Rettig suggested is necessary for the IRS to be able to use the additional information it is expected to collect.

Commissioner Rettig also urged Congress to give IRS more authority to scrutinize cryptocurrency holders.

Testimony and opening statements are available here.


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Washington Council Ernst & Young
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