Yellen should utilize the resources available before pushing new regulations

Treasury Secretary Janet Yellen presides over such a vast array of financial information database silos that she might be forgiven for not knowing how they are all used — or not used, as the case may be. But that hasn’t stopped her from requesting even more information reports to provide her agency with clues for the purpose of increasing tax compliance. But there exist monetary costs and — maybe more importantly — costs in terms of trust in effecting such a strategy.

Yellen is point person for the controversial legislative request to compel the U.S. banking system to produce inflow/outflow information pertaining to American bank account holders and substantive bank transactions to the IRS in order to facilitate IRS tracking of potential unreported income. The theory is that more bank reports on individual taxpayer/bank customers would assist in computing and assessing increased tax revenue. Since banks are already required to report annual individual Interest and Dividend income via Form 1099 to IRS Service Centers located throughout the U.S., the thinking goes, why not expand that requirement and have banks report inflow and outflow transactions — that total more than $600 as initially suggested, or $10,000 as House Ways & Means Chairman Richard Neal (D-Mass.) has countered — over the course of the year?

Indeed, at first glance, the idea sounds good. There currently exists an expanding overall government deficit, repayment of which will likely weigh down future generations — and a yawning “Tax Gap” deficit between what is reported to Uncle Sam and what should be reported. And then there are the expensive Democratic budget proposals to account and hopefully pay for in the future, to say nothing of past Republican-sponsored tax cuts to corporations and the wealthy that were never paid for.

But first, Yellen should explain just how — and to what end — some of the other database reports maintained by the U.S. Treasury are utilized.

My last job (over five years ago) was as a contractor to the Justice Department wherein I was directed to “follow the money” derived from cartel activity. I became very familiar with the databases contained within the Financial Crimes Enforcement Network (FinCEN). It was mind-boggling the amount of information available to law enforcement for criminal investigative purposes. While I was attempting to make some money-laundering cases and conduct asset forfeiture of large drug dealers, I could not help but wonder just what the IRS could do to attack the “tax gap” if they could apply all the data contained within FinCEN to the tax returns contained within their service centers.

For example: Banks already are compelled to report to FinCEN Currency Transaction Reports (CTRs) over $10,000 conducted on their premises. Millions of these currency transaction reports are filed with FinCEN every year on pain of both civil and criminal penalties should the bank fail to do so. There exists a cost incurred by the banks to produce these CTRs. What is the return to Treasury and law enforcement with regard to these filings? And most significantly, what does the IRS do with all of these CTRs? Are they associated with individual taxpayer returns? If so, what tax revenues have they produced? Does the Treasury know? Does the IRS know? Does anyone? Where are the reports delineating just how these CTRs are used and the total return relative to the cost of producing and maintaining them? 

Anecdotally, CTRs are being used by law enforcement to identify drug dealers, racketeers, and other crooks. It is also known — again anecdotally — that when banks recognize that shady characters may be “structuring” their cash transactions or conducting other murky financial dealings, the banks often file Suspicious Activity Reports (SARs) with FinCEN (more than a million in 2019). SARs have provided productive leads to law enforcement for the fruitful criminal investigation of such well-known felons as Paul Manafort, Elliot Spitzer, and Dennis Hastert.

Anecdotal news is nice. Empirical evidence is much better — particularly when Uncle Sam wants to stick his nose into personal bank accounts.

Every year the IRS produces a data mining report to Congress as required. The last available report covers 2019. While the IRS notes it makes use of above-mentioned reports as leads for criminal investigations, it provides no empirical data as to the efficacy of these reports in terms of indictments or prosecutions. The IRS provides even less empirical data as to the efficacy of their own data mining programs in terms of the number of civil audits/examinations generated by their data mining efforts — much less the amount of revenue produced. The 2019 report in fact states that no empirical data is available on the efficacy of three IRS data mining programs.

The CTR and SAR databases are two of the best-known FinCEN databases, maintained for years by the U.S. Treasury, yet little is really known empirically as to their overall efficacy. 

Treasury and IRS should answer some basic questions before anyone finds credible Yellen’s erstwhile argument that a new bank reporting requirement is needed to increase tax revenues: What is the overall cost to the banks to produce the CTRs and SARs? Exactly how many criminal investigations, prosecutions, and convictions resulted from the filed reports? And most importantly, what taxes have been assessed and collected stemming from the filing of CTRs and SARs? 

There also exist other bank-related databases within FinCEN — not as well-known, but that certainly provide the potential to address revenue shortfalls: Foreign wire transfers over $10,000 and Reports of Foreign Bank and Financial Accounts (FBARs). These databases are reputed to be used most often by federal law enforcement in tracking drug proceeds and money laundering activities, particularly foreign-based financial transactions in the case of FBARs. While some folks may recall Paul Manafort not filing FBARs with regard to his bank account and shell company transactions in Belize and Cyprus, how many other wealthy U.S. taxpaying citizens (Yellen’s purported target for increased tax revenues) have reported all of their six-figure overseas bank accounts? Does the IRS make good use of FBARs in tracking offshore monetary transactions that represent income? What about Foreign wire transfers streaming into domestic personal bank accounts? Are those correlated with tax returns and/or FBARs? Does anyone know? If not, why not?

The recently released Pandora Papers highlight the widespread use of offshore shell companies and bank accounts by the wealthy to hide their riches untaxed. These offshore devices are frequently facilitated by specialized law firms, accountants, financial consultant companies, and corrupt banks and bankers. U.S. government authorities recognized this problem years ago and legislated the Foreign Account Tax Compliance Act (FATCA) which requires foreign banks to report U.S. based taxpayer possession of foreign bank accounts and other valuable assets worth a particular amount. 

Again, Treasury and IRS should answer some basic questions: Where are the reports on the effectiveness of FATCA? Has FATCA been fully implemented? Are foreign banks in compliance? What revenues have resulted? What has been the return on investment in regard to the law? Certainly, domestic American banks would like to know how their foreign brethren have processed this legal requirement.

To my knowledge, there exists no prohibition against the IRS using the above-referenced silos of data in association with other revenue-measuring activities.

Yellen should send Congress a package of reports detailing the efficacy of each of the databases maintained by her agencies with regard to their impact on revenue enhancement before demanding that financial institutions issue yet another intrusive client report collecting digital dust in some database hardly used.

Congress — and common taxpayers — should be interested and should know: Does the IRS make efficient use of all the above-referenced data? If so, to what extent? How much revenue has been identified from these reports? How much tax has been collected? If the information contained in the above-referenced databases is effective, why then is there a need for additional bank filings on taxpayers’ bank activity?

And Congress shouldn’t be allowed to slip off the hook here. Lawmakers need to ensure that the IRS has the resources to effectively track and correlate to tax returns all the open databases in FinCEN.

Currently the IRS still makes use of computers and software from the 1960s and has been in desperate need — for decades — of updated, automated equipment, software and IT resources to maximize the use of all the resources available. Surely minimal investment in some new IT resources and expertise would be more cost-effective than simply dictating that banks provide more reports that cost us all in both cash and trust.

Let’s ensure all the data available to Treasury and the IRS are being put to optimal revenue enhancement use before legislating new requirements for banks to issue new customer reports that may or may not violate privacy expectations.

Martin J. Sheil is a retired supervisory agent for IRS Criminal Investigation with 30 years experience, including service as coordinator of the Organized Crime Drug Enforcement Task Force (OCDETF) for the Gulf Coast Region, Branch Chief for the North Texas District (Dallas), Special Agent in Charge for the South Texas District (San Antonio) and as Director of IRS CI Asset Forfeiture in Washington, D.C.