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Who's Afraid of IRS Bank Reports?

The Treasury has released a fact sheet on reduced bank information disclosure requirements currently being considered: Tax compliance proposals will improve tax equity while protecting taxpayer privacy. The proposal seems quite controversial. The Editorial Board of the Wall Street Journal gives us the $ 10,000 IRS Tax Network.

The real policy goal here is to create a mechanism to trigger audits, probably through an algorithm, so that the IRS can review all of a taxpayer's business and financial records.

And I only think about the work papers

It's really embarrassing, because what I end up thinking with the proposal is all the long-winded working papers that I would do if I was still really working. It's not that writing and consulting isn't a job, but as an accountant I think you're not really working if there are no working papers involved.

There is another thing about being an accountant. I really like to fix things. It is so satisfying. I am disappointed that one way or another they exclude payroll deposits from reporting. If you had a client who, like most sensible people, had their paychecked directly deposited, you could do this neat reconciliation. The new reporting requirement is just two numbers: total input and total output. If you only enter the payment into the account, you should be able to get very close, if not exactly, to the W-2 entries.

But maybe there are more things like expense reimbursements and withholdings that don't show up on the W-2. The compulsion to tie things up would be almost irresistible. Only the practical concern that no one wants to pay for the time or really cares would get in the way.

Why exclude payroll?

For the life of me, I don't understand how exclusion from government payroll and benefit payments makes this program better or worse for taxpayers. Banks seem to find it somewhat more complicated to implement. It is much easier to add everything up and report the total than it is to exclude certain things, which opens up the possibility of making mistakes.

Will you do something different for an audit?

On a more serious level, this disposition would prompt me to do something a little more thoroughly than I would routinely do. In order to prepare for an audit, I would go through every deposit in all of a client's bank accounts. If it is an income item, it should appear somewhere on the return. Transfers from one account to another must cancel each other.

Now there will be a number to link to. So you can put together a really neat schedule that shows income items cross-referenced to where they appear on the return, non-taxable receipts, transfers cross-referenced to other account outflows, and everything is related. The thing is, IRS tax agents are accountants. They really appreciate things like that.

I remember once, after doing this exercise, I discovered that my client had deposited an income item to the wrong account. With his permission, I told the agent about it right at the beginning of the audit while handing him the book that had all the useless documents he had requested. He ended up without even bothering to type it.

When it comes to entities that keep double-entry books, generating a schedule that ties total deposits to repayment shouldn't be that difficult. There will be consultants who make it sound a lot harder than it is so they can charge you big bucks for their custom audit prep software, but that's life.

What is the point?

The big mystery to me is how this will find undeclared income. I find it hard to believe that people who do not report income deposit it in the bank. Isn't that what cash is for?

I must admit that if there are a lot of deposits and withdrawals going around and nothing like that in terms of positive taxable income, that could be a sign that something is up. The dubious monetized installment sales, which I have covered, would be highlighted with this report.

There are reasons to be skeptical that the IRS will get much out of the new source of information. In 2018, TIGTA reported that the IRS was not taking advantage of currency reports generated under the terms of the Oxymoronic Bank Secrecy Act. That was a follow-up to a 2010 report that had a similar conclusion. Ironically, the biggest impact seemed to be the prosecution of people for trying to avoid bank reports, a crime called structuring.

The elaborate rules on reporting foreign bank accounts also appeared to result primarily in people who don't try to get away with severe penalties. At least the current proposal does not impose a new reporting burden on individuals.

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