Document Type
Article
Publication Date
2025
Publication
IRS Research Bulletin (Publication 1500)
Volume
6-2025
Abbreviation
IRS Rsch. Bull.
First Page
197
Abstract
Third-party information reporting enhances tax compliance. When substantial information reporting is present, the compliance rate reaches 94 percent, compared to just 45 percent when there is little or no information reporting. Accordingly, policymakers have expanded information reporting requirements over the past several decades to enhance revenue collection. More recently, Congress has expanded information reporting requirements for third-party settlement organizations (“TPSOs”) by significantly lowering the reporting threshold from $20,000 to $600 as well as eliminating the requirement for 200 or more transactions. While such a shift will subject more taxpayers to information reporting, it will also create additional burden on the IRS to process the influx of new information returns. Although the new $600 threshold was enacted in 2021, the IRS has announced it will delay enforcement until at least 2025, using the old $20,000/200 transactions threshold for 2023, and a phased $5,000 reporting threshold for 2024.
The IRS’s delayed implementation of the new $600 reporting threshold for TPSOs illustrates a tension in tax administration. More information is generally better for tax enforcement, as subjecting more taxpayers to information reporting means that more individuals should be deterred from cheating and should report their income accurately. However, casting a wider net imposes costs. First, more information returns impose a greater burden on the IRS to process those returns, as well as greater costs on the third parties that must issue the returns. Second, casting a wider net among taxpayers will likely increase the chances that nonreportable income shows up on information returns (for example, gross proceeds from casual sales that do not exceed basis), increasing complexity and confusion among taxpayers. Third, and relatedly, if information returns become too prevalent (particularly for nontaxable income), taxpayers may perceive they are not meaningful and they may lose some of their deterrent effect. Thus, in setting a threshold for information reporting, policymakers face a tradeoff between these costs and the foregone revenue that results from unreported income.
The current approach to enhancing tax enforcement through information reporting has been to expand its use through either lowering the reporting threshold (as in the recent case of TPSOs) or widening the scope of third parties required to report. Either approach generally results in more information returns issued to more taxpayers. However, there is a third approach that has received virtually no attention in the United States: policymakers could also increase the frequency and efficacy of tax information sent to taxpayers. More specifically, Congress could require information returns to be sent quarterly to align with taxpayers’ estimated tax payment deadlines. While receiving quarterly tax information would likely help taxpayers make timely estimated tax payments, this approach is also not without costs. Third parties would have an increased burden to compile and distribute tax information four times rather than once a year. And although the IRS would not have to process quarterly information returns (which would be sent only to taxpayers), it would have to enforce a requirement to send quarterly returns (for example, by imposing penalties on third parties who fail to do so). This article will explore the tradeoffs between the current approach of expanding the scope of information reporting with an approach that requires more frequent information.