This chapter outlines the advantages and limitations of both third-party and first-party reporting requirements. We begin by evaluating the Biden Administration’s 2021 bank information reporting proposal as an example of a third-party information reporting reform. Then, we provide a model for introducing first-party information reporting from high-end taxpayers regarding their finances through an annual wealth reporting form, which we call the Annual Net Asset Statement. Next, we introduce a hybrid system that incorporates both first- and third-party information reporting and explain how this system would have offered an alternative approach to the Biden Administration’s proposal for reporting inflows and outflows from financial accounts. Finally, we describe how this framework can help improve the tailoring of penalties for noncompliance in two areas: with information-reporting obligations, and in the use of audit resources. We explain how a means-adjusted approach can improve the operation of these information-reporting rules and complement the activity-based focus in current law.

Tax-information reporting is an essential element of the tax compliance system. Despite the power of tax-information reporting to maximize the IRS’s ability to collect taxes owed, these rules also contain significant gaps. High-end taxpayers can often earn their income through transactions that do not require a third party to file tax-information reports with the IRS. This chapter demonstrates how the activity-based approach to information reporting often allows high-end taxpayers to engage in noncompliance with the tax law, while other taxpayers face significant automatic IRS scrutiny. It also shows that the government’s approach to tax-information reporting applies almost exclusively to specific activities, ranging from methods of earning income to designated transactions. This approach is consistent with the government’s design of other tax compliance rules that apply to certain types of activities, such as the use of tax shelters, offshore bank accounts, and transactions lacking economic substance to avoid tax liability.