[Congressional Record (Bound Edition), Volume 152 (2006), Part 3]
[Senate]
[Pages 3620-3622]
[From the U.S. Government Publishing Office, www.gpo.gov]




          SIMPLIFICATION THROUGH ADDITIONAL REPORTING TAX ACT

  Mr. BAYH. Mr. President, yesterday I introduced legislation, entitled 
the Simplification Through Additional Reporting Tax, START, Act of 
2006, that will require brokerage houses and mutual fund companies to 
track and report cost basis information to their customers and the IRS. 
The legislation is cosponsored by Senators Obama, Carper, Kerry, and 
Levin and is based upon a recommendation made by the National Taxpayer 
Advocate, the organization created as part of the 1998 IRS 
Restructuring and Reform Act whose explicit purpose is to make 
recommendations to Congress to simplify the tax code.
  Over 130 million Americans are now struggling with the difficult job 
of filling out their taxes and 32 million taxpayers will likely have to 
report a capital gain or loss. For taxpayers all across the country 
that are angry and frustrated with the tax code, the START Act will 
hopefully provide some measure of relief and, at the same time, help 
close what is called the ``Tax Gap.''
  The Federal Government now fails to collect close to $350 billion in 
taxes that are legally owed. This is called the tax gap, an amount that 
exceeds last year's $318 billion deficit, or this year's projected 
deficit of $336 billion. The National Taxpayer Advocate has observed 
that if we eliminated the tax gap, we could cut taxes for every 
American by $2,000. This would only be true, of course, if we ran a 
surplus. Because we are running a deficit, and will likely be doing so 
for the foreseeable future, the tax gap is really a $2,000 tax increase 
on our children and grandchildren, with interest building every year. 
This is a moral failure that needs to be addressed.
  Unfortunately, while there has been a lot of discussion about this 
issue in the halls of Congress and within the administration, there has 
been little action. In the last two years, there have been six 
congressional hearings on this issue. The Internal Revenue Service 
Commissioner Mark Everson has said that this issue is a top priority 
and that over a period of time the government could collect between $50 
and $100 billion of the tax gap ``without changing the dynamic between 
the IRS and the [American] people.'' However, in their latest budget, 
the Bush Administration has introduced proposals that only attempt to 
close $259 million of the tax gap in fiscal year 2007, or approximately 
one-tenth of 1 percent of the tax gap as measured in 2001. This is a 
failure of leadership. More can be done.
  The legislation that I am introducing today does not eliminate the 
tax gap, but it does address a significant part of the problem. 
Specifically, the START Act of 2006 addresses the portion of the tax 
gap related to capital gains. This part of the tax gap results from the 
underreporting of capital income, and can include income related to the 
sale of stocks, bonds, real estate, and a myriad of other investments. 
According to the IRS, the revenue loss from the underreporting of 
capital income is $11 billion annually. It is important to understand 
that this figure is based on 2001 data. Since 2001, the amount of 
revenue collected through capital gains taxes has increased by $190 
billion, from $349 billion in 2001 to $539 billion in 2005. If one 
makes the reasonable assumption that the misreporting percentage has 
stayed stable during this period, the $11 billion problem in 2001 is 
now a whopping $17 billion problem in 2005. Over 10 years, assuming no 
growth in capital gains realizations, this potentially represents $170 
billion in revenue that the Federal Government is failing to collect.
  The START Act is intended to accomplish three goals: first, reduce 
the deficit by closing a portion of the tax gap; second, simplify the 
tax-filing process for the millions of Americans who pay capital gains 
taxes; and, third, make the tax code fairer.
  The first goal of this legislation is to reduce the deficit. We not 
only have a moral responsibility to our children and grandchildren to 
begin seriously addressing our growing deficit and debt, we also need 
to do so to protect our vital trade and national security interests. 
The total public debt now stands at $8.2 trillion, or $27,728 for each 
man, woman, and child living in America. This week, the Senate will 
likely vote again to raise the public debt limit, this time to $9 
trillion. By 2011, the debt will have reached $11.8 trillion. In the 
last three years alone, we will have increased the debt limit by $3 
trillion, a 40-percent increase from when President Bush took office in 
January 2001.
  While we are mortgaging our country, it is important to ask to whom 
do we owe all of this money. Increasingly, the answer is foreigners, 
and this development represents an economic and security threat to our 
country. In December 2005, an estimated $2.2 trillion of the publicly 
held debt was owned by foreign creditors, such as the Chinese and 
Japanese. It took 42 Presidents 224 years to run up a trillion dollars 
of debt held by foreigners. This President has more than doubled that 
amount in just five years. This has weakened our country. Why? Because 
when the value of the U.S. dollar plunges at the mere suggestion by a 
Japanese or Chinese central banker that they will sell their holdings 
in U.S. dollars, it signals that we no longer control our economic 
destiny. This level of dependency affects

[[Page 3621]]

our ability to bargain from a position of strength on national security 
issues with foreign countries. It is worth remembering that there has 
never been a country that is militarily strong, but financially weak, 
yet that is the path that we are on today.
  Vice President Dick Cheney famously said that ``deficits don't 
matter.'' Well, they do, as almost all economists will tell you. And 
the reason they matter is that when we borrow, we prevent both the 
private sector and the public sector from being able to invest in our 
country's and our children's future. Our children are now part of a 
global economy, and are competing against children in Japan, India, and 
China for the jobs of the future. If we fail to invest in their future 
because instead we are paying off our debts, we will become the first 
generation to leave a country that is worse off than the one that we 
inherited.
  While the START Act of 2006 will not balance the budget, it does 
represent a step in the right direction. The impact of START has not 
yet been scored by the Joint Tax Committee, so the impact on the 
deficit is not known. Nevertheless, the capital gains tax gap is now 
$17 billion per year. My proposal might not close the entire gap, but I 
expect that it will make a very meaningful down payment on the problem.
  The second goal of my legislation is to simplify the tax-filing 
process and help American taxpayers spend less time filling out their 
taxes. It is no secret that the Tax Code is overly complex. It now has 
over 17,000 pages and contains almost four times as many words as the 
Bible. The IRS now prints over 1,000 publications. Americans now spend 
5.8 billion hours and $194 billion every year to complete their tax 
forms. According to the National Taxpayers Union, the number of 
taxpayers using paid professionals has soared by approximately 60 
percent since 1980 and by nearly 30 percent since 1990. Reflective of 
this complexity is the fact that one of the leading tax preparation 
firms, H+R Block, was in the news recently because it could not 
accurately do its own corporate tax return.
  One of the most complex areas of the tax code is Schedule D, the form 
that taxpayers must fill out when they report their capital gains and 
losses. For the average taxpayer, simply filling out this one schedule 
adds 7 hours to the tax return filing process almost a full work day. 
And, for taxpayers using return preparers to complete this form, it can 
add significantly to their costs.
  Computing a capital gain or loss would seem, on its face, easy 
enough. You need to know the original purchase price and the final 
sales amount. Taking the difference between the two should determine 
the amount of gain or loss. Taxpayers do have the final piece of the 
puzzle--the sale price, as brokerage houses and mutual funds now report 
this information, called ``gross proceeds,'' to their customers and the 
IRS on Form 1099B. But what taxpayers are not told, and what is 
extremely difficult to calculate, is what is called the ``adjusted cost 
basis'' in their investment. This is a technical term for the original 
price of the investment, plus any necessary adjustments.
  Taxpayers face enormous challenges in trying to determine the 
adjusted basis of the securities they have held for many years. The 
first challenge is simply a matter of recordkeeping. Brokers usually 
send an investor a certificate of ownership stating the original 
purchase price of the asset. But stocks or bonds or mutual funds can be 
held for long periods of time, and many taxpayers lose this information 
and thus are left without any record of what they paid for the 
investment. The second challenge is a more serious one and stems from 
the fact that a taxpayer's capital gain or loss is not always simply 
the difference between the purchase price and sale price. Taxpayers 
must often adjust the tax basis they have in their investments due to 
certain events that take place during their ownership of the security. 
For example, if a company's stock splits, the tax basis in that stock 
must be cut in half; alternatively, if there is a reverse stock split, 
the tax basis in that stock must be doubled. Consider, too, that if you 
reinvest capital gains or dividends in the same investment, you 
likewise have to adjust your basis. Determining the adjusted basis can 
be a very complex undertaking and, under current law, sole 
responsibility for this calculation falls on the taxpayer.
  The START Act would eliminate both of these challenges. By requiring 
brokerage houses and mutual funds to track and report taxpayer's 
adjusted basis information, countless hours or days of frustration 
would be eliminated for the 32 million taxpayers who pay capital gains 
taxes. More importantly, these taxpayers would have confidence that the 
amount that they are paying in capital gains taxes is the correct 
amount. Information returns of this sort will provide taxpayer's with 
accurate information about their investments that they simply can plug 
into their tax returns. No more trips into the attic to rifle through 
old boxes. No more having to sit down and try to calculate the impact 
of ten stock splits and reorganizations on your shares of IBM or AT&T 
stock.
  In addition to reducing the deficit and making the tax-filing process 
simpler, the START Act will also make the tax code fairer. Presently, 
the tax code discriminates against middle-class Americans who earn the 
overwhelming majority of their income in the form of wages. The reason 
is that middle-class Americans cannot underpay their taxes because 
their employers submit wage information reports, called W-2 forms, to 
the IRS. If a factory worker in Indiana wants to underpay his taxes, 
the IRS will know about it since his employer sent the amount that he 
earned in wages to the IRS.
  By contrast, taxpayers that rely on capital gains for their income, 
however, are accountable to only themselves. Under current law, the IRS 
lacks the ability to monitor the accuracy of taxpayer's calculations 
since initial purchases are not reported to the IRS. This provides 
dishonest taxpayers with an opportunity to inflate the tax basis they 
have in their investments, thereby underpaying their capital gains 
taxes. Taxpayers that have capital gains income are thus on the honor 
system to report accurately. While that may work for the Boy Scouts, it 
doesn't work when it comes to paying taxes. Now many capital gains 
taxpayers are honest, but some are not. And if the dishonest ones want 
to do some Enron accounting, there is virtually no way that the IRS can 
detect it.
  The START Act addresses this inequity between wage and capital income 
earners by putting them on a level playing field. By requiring that 
adjusted cost basis information be reported to the IRS, every taxpayer 
that has a capital gain will be treated in the exact same way that 
every wage earner is treated. If we want everyone to play by the rules, 
then everyone should be held to the same level of accountability. 
Moreover, if we want Americans to believe that their tax system is 
fair, then we need to make sure that they believe that the person next 
door is actually paying their fair share in taxes. Third party 
information returns that allow the IRS to determine if someone is 
paying their taxes accurately are critical to ensure taxpayers comply 
with the law and that everyone is paying their fair share in taxes. The 
IRS uses this type of information return for wages, dividends, and 
interest income, and in these areas, the amount of non-compliance is 
negligible. Why should we not hold capital gains income to the same 
standard?
  To accomplish the three goals that I have discussed, my bill requires 
brokerage houses and mutual funds to track and report their customer's 
adjusted basis and provide this information to their customers and the 
IRS. The reporting requirement would only apply prospectively to 
securities acquired after the effective date. This would prevent 
companies from having to undertake costly and time-consuming efforts to 
determine basis information for assets that could be decades old.
  The START Act applies to stocks, bonds, and mutual funds. For other 
types of securities, the bill grants authority to the Treasury 
Secretary to determine if the reporting requirement

[[Page 3622]]

should apply more broadly. Financial instruments, such as derivatives, 
swaps, and options are not covered in the bill, but the Treasury 
Secretary may decide to include or exclude them when implementing the 
legislation.
  The START Act candidly acknowledges that there will be cases where it 
will be difficult or impossible for companies to provide accurate basis 
information. In these cases, such as gifts, bequests, and specialized 
cases where unique basis adjustment rules come into play like wash sale 
rules, the legislation grants the Treasury Secretary the authority to 
require brokerage houses and mutual funds to provide other information 
that will allow the IRS to understand why basis information is not 
being provided. For example, in the case of a gift where the adjusted 
basis is unknown, a brokerage house could in lieu of supplying the 
adjusted basis figure, simply denote instead a ``G'' on the information 
return issued to the taxpayer and the IRS.
  The START Act also provides authority to the Treasury Secretary to 
issue regulations that will facilitate the transfer of cost basis 
information when investors move assets from one brokerage house, or 
mutual fund, to another. A significant amount of basis information is 
currently lost when individuals move their financial accounts from firm 
to firm and the original purchase price information is not transferred 
to the new broker.
  Finally, the START Act requires companies to begin tracking adjusted 
basis information during the 2008 tax year and taxpayers will receive 
their first reports by January 31, 2009. This will give companies close 
to 2 years, more than ample time, to put the processes and systems in 
place to comply with this new regulation. Moreover, it will give 
impacted companies close to 3 years before they have to issue their 
first information report.
  Any proposal that imposes a new reporting requirement will have its 
critics and I am sure this proposal will attract its fair share of 
attention from some in the securities industry that don't like this 
idea. I would simply ask these potential critics read the bill before 
they pass judgment on the idea. I have tried to take a balanced 
approach and have sought input from a wide-range of experts and 
affected parties. Specifically, I have tried to balance the need to 
improve tax compliance with the goal of not placing an undue burden on 
industry. Specifically, by making the legislation prospective and 
providing three years of lead time before the industry must issue their 
first information report, I believe this legislation will present 
minimal burdens for industry.
  In drafting this legislation, I have shared this legislation widely 
with industry, government officials, academics, and other tax 
professionals in order to craft the best bill possible. I have received 
input from the Securities Industry Association of America, the 
Investment Company Institute, the American Institute of Certified 
Public Accountants, and the National Association of Enrolled Agents. I 
have also reached out to small brokerage firms and mutual funds in 
Indiana to hear their perspective. In addition, the Government 
Accountability Office, the Internal Revenue Service, and the Joint Tax 
Committee have been consulted for their expertise on this legislation. 
During these consultations, I have not heard any explicit criticism of 
the proposal, but have received many helpful suggestions on ways to 
make this legislation both balanced and fair to companies and 
taxpayers. However, I do expect that there could be some philosophical 
and technical issues that are raised with the bill, so I want to take a 
moment to highlight those and respond to them immediately.
  First, this proposal does not raise capital gains tax rates. For 
those that are legally paying the right amount in capital gains taxes, 
they won't pay one penny more in taxes. This proposal only ensures that 
people pay what they legally owe. And, moreover, what is happening 
today is that our failure to collect the taxes that are legally owed is 
effectively imposing a tax increase on our children and grandchildren 
who will have to pick up the tab for our fiscal failure to merely 
enforce the laws on the books. For this reason, I would argue that if 
my bill is enacted it would represent a tax cut for our children and 
grandchildren who will pay higher taxes if this problem is not 
addressed.
  Some may look at this proposal and dismiss it as antibusiness and 
just another government regulation. I am sure there were some that had 
similar concerns when it was first proposed that all U.S. employers 
should report wages to the IRS. Now, however, we know that this 
reporting requirement is a cornerstone of ensuring tax compliance. 
Moreover, the reporting requirement does not elicit any protests from 
employers because they realize that without it, the U.S. Treasury would 
lose billions in legally owed taxes. As I have said before, the honor 
system may work for the Boy Scouts, but it is not a great way to 
collect taxes. Finally, no business would be able to succeed if every 
year it failed to collect $17 billion per year in sales. In fact, any 
responsible company would move heaven and earth to address such a 
problem. U.S. taxpayers deserve the same level of accountability.
  Some brokerage houses or mutual funds may argue that companies cannot 
provide this information because, in some cases, the correct 
information doesn't exist. This argument does not square with the fact 
that there are plenty of examples of companies that already provide 
cost basis information to their clients. If Fidelity or Ameritrade or 
E*Trade can provide cost basis information to all of their clients, it 
clearly suggests that the information can be provided.
  Some may argue that this proposal will be costly to implement, even 
if it is a prospective proposal, because they don't have the systems in 
place to track and report cost basis. I would invite them to go talk to 
companies that have already decided to offer basis-tracking for their 
clients, and ask them how much it cost to offer this service. I would 
also ask them to talk to the software vendors and companies that 
provide basis tracking services to brokerage house and mutual funds. 
What they will tell you is that the cost is reasonable. According to a 
leading company that provides basis tracking services to brokerage 
firms and mutual fund companies, it typically charges on an annual 
basis approximately $1 per account. For a company with 10,000 accounts, 
that is a yearly charge of $10,000, a small figure when you look at the 
revenues of a brokerage firm of this size.
  Some may point out that there are some types of transactions or 
securities where a brokerage firm or mutual fund cannot reasonably be 
expected to provide accurate cost basis information. My bill candidly 
acknowledges this fact. In these cases, brokerage houses and mutual 
funds will simply be required to provide ``other information'' that 
will allow their customers and the IRS to understand why adjusted cost 
basis information could not be provided. This is already standard 
practice for many companies that provide cost basis information to 
their customers.
  In conclusion, this should be an issue that honorable members from 
both sides of the aisle can agree needs to be addressed. Democrats and 
Republicans will fight endlessly about what tax rates should be, but I 
believe all Members should agree on the principle that all taxpayers 
should pay what you owe. We should also all agree that we need to 
reduce our deficit, simplify the tax-filing process, and promote a fair 
and equitable tax system. The START Act of 2006 is intended to make 
progress on all of these goals. I hope it can start a civil 
conversation about ways to improve our tax system. I look forward to 
working with all interested parties to craft a workable proposal that 
provides some needed relief to our overburdened taxpayers.

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