May 11, 2021

At Hearing, Warren Makes the Case for Upcoming IRS Tax Enforcement Bill

Warren will introduce legislation with mandatory funding for the IRS to boost tax enforcement for wealthy individuals and giant corporations; The top 1% account for more than a third of all unpaid federal income taxes - costing about $175 billion a year

Washington, DC - At today's Senate Finance Subcommittee on Taxation and IRS Oversight hearing, United States Senator Elizabeth Warren (D-Mass.) questioned former Internal Revenue Service Commissioner Charles Rossotti to highlight the importance of third-party information reporting -- further making the case for her upcoming bill that would boost tax enforcement for the wealthy and giant corporations.

Currently, the IRS has the least visibility into incomes that are overwhelmingly concentrated among the very richest taxpayers. Most Americans earn most of their income in the form of wages, and that information is automatically reported to the IRS by the employer. However, Americans in the top 1% receive much of their income in the form of business interests and capital gains for which there is little third-party information reporting. As a result, the IRS effectively counts on the richest taxpayers to follow an honor system when filing their taxes.

When asked if this honor system is working, Mr. Rossotti said that "the reporting level on income that is not third-party reported is as low as 50%." Senator Warren cited another study estimating that the top 1% fail to report a fifth of their income and account for more than a third of all unpaid federal income taxes - costing an estimated $175 billion each year.

In the coming weeks, Senator Warren will introduce a bill that will make our tax system fair by strengthening third-party information reporting to help people file their taxes more easily and accurately while making it harder for the richest taxpayers to underreport their income and skip out on the taxes they owe. Her bill will also provide protected and sustained IRS funding and focus enforcement on the wealthy and giant corporations.

Transcript: Closing the Tax Gap: Lost Revenue from Noncompliance and the Role of Offshore Tax Evasion
U.S. Senate Finance Subcommittee on Taxation and IRS Oversight
Tuesday, May 11, 2021

Senator Warren: Thanks very much. Thank you.

I'm glad we're focusing on the gap between taxes owed and taxes collected. I'm introducing a bill with mandatory funding, the funding lasts year by year by year so that the IRS can boost tax enforcement for wealthy individuals and for giant corporations - who are some of the biggest tax cheats. And I know that President Biden has a similar proposal.

But funding isn't all that the IRS needs to do better enforcement.

When a teacher sits down to do her taxes, she relies on a W-2 that tells her exactly how much she earned in wages. Her school sent her this W-2 automatically, and it sent a copy to the IRS as well. This is called "third-party reporting" and it helps the teacher fill out her tax return accurately. It also helps the IRS do its job - both by making it easier to verify incomes, and by keeping people honest because they know the IRS can spot it if they fudge the numbers.

So, Mr. Rossotti, I want to run through a few examples with you if we can. If you own your own law firm, is there as much third-party reporting on how much you made as there is for the teacher?

Mr. Rossotti: Look, most law firms are organized as partnerships and there is limited-- there is some reporting but it's quite limited on partnerships, whereas of course, wage earning is 100% reported.

Senator Warren: Okay, and what about if you own a giant beachfront mansion and you sell it for a lot more money than you bought it - in other words, you made a capital gains-- capital gains income. Is the IRS likely to know exactly how much income you received?

Mr. Rossotti: Well, of course, you're required to report it as a capital gain, but there isn't any third-party reporting on that kind of a transaction.

Senator Warren: So, the IRS has no independent verification of it automatically?

Mr. Rossotti: Not unless it does an audit.

Senator Warren: Okay. And what about if instead of selling your mansion, you decide to post it on Craigslist and rent it out. Is the rental income you get likely to be automatically reported to the IRS?

Mr. Rossotti: Same answer. I mean, you're required to report it, of course, but there is no third-party reporting on that transaction if you just rent the property yourself.

Senator Warren: Okay. So, here's the thing: the kinds of income that the IRS has the least visibility into are the kinds of income that are overwhelmingly concentrated among the very richest taxpayers.

So, if you're a teacher, a construction worker, a bank teller, nearly all of your income comes from wages, and that information is automatically reported to the IRS by your employer. But if you're someone, say, in the top 1%, most of your income is coming from business and capital income - and the IRS is counting on you to follow the honor system when you file your taxes.

So, Mr. Rossotti, as a former commissioner of the IRS, you saw this first hand. Let me just ask you: do you think the honor system is working?

Mr. Rossotti: Well, it works to a certain extent because there's a great deal of income that is not reported that is third-party that is still reported by taxpayers. But, it is also true, I think as Mr. Johnson noted in his report earlier, that the reporting level on income that is not third-party reported is as low as 50% on the kinds of income that you-- you identified in your example.

Senator Warren: Okay.

Mr. Rossotti: There is a big difference.

Senator Warren: I think the conclusion we can derive is strengthening third-party information reporting would obviously help people file their taxes more easily and more accurately and frankly make it harder for wealthy tax cheats to get away with hiding their income. The top 1% fail to report -- I've heard -- more than a fifth of their income -- you're saying it may be as much as half -- and more than a third of all unpaid federal income taxes. That cost us an estimated $175 billion dollars in tax revenues last year.

So, that's why my legislation takes Mr. Rossotti's advice and requires banks and other financial institutions to provide the IRS with information on account holders' balances. It would fill in the holes that allow the richest taxpayers to underreport their income and skip out on the taxes they owe.

Strengthening information reporting, as well as providing protected and sustained IRS funding would ensure that we focus enforcement on the biggest fish. This is about making our tax system fair and about raising the revenue that we need to create opportunity for every kid in America.

Thank you, Mr. Chairman. I yield back my time.

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