President Biden recently announced his proposal to vastly expand the size and authorities of the Internal Revenue Service. The expansion would require an additional $80 billion in Congressional funding over the next 10 years. If passed, the IRS would hire an additional 87,000 workers over the next decade, doubling its current size. It would also require banks, payment services — such as PayPal and Venmo — and cryptocurrency exchanges to report client account information to the IRS, including cash inflows and outflows.
The IRS estimates that the “tax gap” — the difference between taxes owed and taxes actually collected — was $600 billion in 2019. Over the next decade, the cumulative tax gap would reach $7 trillion. The goal is to generate a net $700 billion of additional tax inflows to the government over the next 10 years, thus reducing the tax gap by 10%.
The proposal is marketed as a way to target the underreporting of income by the wealthy and large corporations. However, these two politically safe targets will not provide the main source of unreported income to the IRS coffers.
The wealthy and corporate America already know they carry a large bullseye of scrutiny from the IRS. Thus, they employ a legion of highly-paid, battle-tested tax lawyers and accountants who know the minutia of the U.S. tax code. According to the IRS’ own estimate, underreporting of corporate income taxes accounts for just 8% of the current tax gap. For wealthy Americans who pay an estate tax, it’s less than 1%. For the IRS, the biggest culprit in the underreporting of income is on individual tax returns, which drives 56% of the tax gap.
Obviously, any proposal that openly targets the everyday, average American would face a public relations nightmare. But the IRS’ own data shows that’s where the bulk of money would come from to meet Biden’s net annual $700 billion of additional tax inflows.
The proposal would impose reporting requirements on cryptocurrency exchanges, which serve as the online marketplace for the buying and selling of Bitcoin and the more than 10,000 other cryptocurrencies. The IRS wants access to client records to capture taxable gains and income on cryptocurrency transactions. However, the majority of these exchanges lie outside the legal jurisdiction of the U.S. Good luck trying to impose U.S. tax laws in nations such as Malta, Tanzania, Estonia or The Republic of Seychelles.
The expansion of the IRS and its authorities would help identify unreported income or overstated deductions on small businesses and entrepreneurs. It would also address the IRS’ ability to tax an expanding component of America’s economic system — the gig economy. The gig economy is a broad-based term that defines the non-traditional workforce of independent or freelance jobs. These gig jobs typically provide a flexibility and freedom to choose if, when and how long to work. It can be a primary job or simply a supplemental source of income.
The proliferation of the gig economy continues to grow. Across the nation, millions of Americans are Uber and Lyft drivers, sell Etsy products from home or engage their regular career in side jobs at nights or on weekends. An estimated 36% of the U.S. workforce is part of our nation’s gig economy, either as their primary or secondary job. At its current pace of expansion, the number of gig workers is expected to reach 86.5 million by 2027, representing more than 50% of the total U.S. workforce.
The list of gig jobs is various and expansive. But most share the commonality of being cash-based or lack the formal IRS controls, such as W-2s, to accurately track the reporting of income and expenses. And for the IRS, that’s exactly what they want to know.
Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.
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