STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS -- (Senate - March 14, 2006)
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Mr. OBAMA. Mr. President, I rise to speak in favor of a bill I am proud to introduce today with Senators Bayh, Kerry, and Carper to help close the tax gap by improving the reporting of capital gains income. This bill requires brokerage firms and mutual fund companies to track and report the adjusted cost basis of their clients' stock, bond, and mutual fund investments.
This bill is a simple, commonsense solution to a serious problem. Many taxpayers have a hard enough time filing their taxes. One of the most complex parts of an individual's tax return is the schedule for capital gains income. And what makes capital gains particularly difficult is the challenge of figuring out the adjusted basis of a security that has been sold.
Many taxpayers do not have the proper records or they don't know how to calculate adjusted basis for a stock that has split or been exchanged as part of a company's merger or acquisition. And right now, the IRS does not have the ability to monitor the accuracy of taxpayer calculations. As a result, there is a risk of error or fraud. In some cases, taxpayers may end up paying too much in taxes. More often, they report too little income and pay too little in taxes.
In 2001, the IRS estimated that underreporting cost the Treasury $11 billion annually. Today the loss is even greater.
Because the IRS fails to collect these funds, the taxes that the rest of us have to pay are greater than they should be. Most people pay their taxes honestly and follow the law to the best of their ability. But a small number of tax frauds--who often owe great amounts of taxes--cheat the system. And it's hard now for the IRS to stop them.
This bill makes it easier to stop them and it helps reduce the amount of Federal tax dollars that the IRS fails to collect each year. Brokerage firms and mutual fund companies will be required to keep track of a taxpayer's cost basis and to report that information to the IRS. This will make it easier for honest taxpayers to calculate their taxable capital gain, and harder for dishonest ones to lie about it. Based on information from the Taxpayer Advocate, reporting to the IRS can improve compliance of capital gains reporting from an estimated 50 percent today to 90 percent.
Fortunately, this new reporting requirement will not pose an undue burden to the financial firms affected. First, the firms will have plenty of time to put the necessary systems in place since the reporting requirement will not take effect until 2009, and then will only apply to securities acquired starting in 2008. Second, technology has made tracking by financial firms simple and efficient. More than 80 percent of all retail accounts already subscribe to a national reporting service for transferring basis information at a nominal cost per account. Finally, in cases where it is impossible to track basis, the Treasury Secretary may develop regulations to require alternative information.
It is estimated that $345 billion of Federal taxes goes uncollected each year. This bill doesn't solve that full problem, but it is a step in the right direction. It reduces the Federal deficit without raising taxes or cutting spending. It simplifies the tax filing process and reduces the chance of error or fraud. It applies what we know about the benefits of automatic reporting to the IRS--which is required now for wage income--to capital gains income as well.
This bill makes sense. It's good policy. I urge my colleagues to join me in supporting it and to helping to improve our tax code.