Proposal for banks to report more information to the IRS continues to get pushback

·7 min read

WASHINGTON — Congressional Democrats are watering down a proposal from the Biden administration to collect more information on people's bank accounts following heavy criticism from the financial sector and Republican lawmakers.

The initial proposal would have required that banks report to the IRS once a year the total value of all inflows and outflows of each personal or business account with more than $600 of activity annually.

The measure, which the Treasury Department estimated would generate more than $460 billion in tax revenue over 10 years, was included this spring in the president’s Build Back Better plan to help offset the cost of the trillion-dollar infrastructure and social program agenda, as well as address the country’s massive tax gap.

But in recent months, the provision has generated increasing outcry from bankers and prominent GOP officials at both the state and federal level, some of whom have heavily mischaracterized the proposed change as giving the IRS the power to scrutinize every individual transaction over $600.

Nonpartisan tax experts also questioned the low threshold, though, as it would have subjected the majority of Americans’ bank accounts to the added layer of oversight and seemed to conflict with the administration’s insistence that it was targeting the wealthiest tax cheats.

“There's an element of bait and switch here, that Biden purports to be throwing this wide net to go after big fish, the one-percenters,” Steven Rosenthal, a senior fellow at the Tax Policy Center, told the Washington Examiner. “But in fact, he's going to catch a whole bunch of small fish in his net — small businesses and small-time cheats.”

As a result of the flurry of criticism, Democrats in Congress, who have been intensely debating the president’s proposed legislation, announced this week that they would increase the threshold to $10,000 and exclude wages and social security payments from that figure.

“The proposal is also not about anybody’s specific transactions. They wouldn’t be reported,” said Oregon Sen. Ron Wyden, chairman of the Senate Finance Committee. “It also wouldn’t create any new surveillance of digital currency. This proposal is about reporting only two numbers once per year: the total amount going into an account and the total amount going out of it.”

The concession underscores the challenge Democrats face in passing President Joe Biden’s agenda in the Senate despite using the reconciliation process that would allow them to move the legislation forward without Republican support. Democrats have a razor-thin majority in the chamber and therefore need every member in their party to sign on but have thus far struggled to win over a handful of centrists who have expressed concerns about the cost of the bill.

Democrats and the Biden administration say the IRS would use the new account data to inform its decisions on who to audit, strengthening its ability to root out wealthy tax cheats. That measure is coupled with a proposed $80 billion in new funding for the IRS over the next decade, which has seen a significant drop in its budget and staffing in recent years.

Meanwhile, the overall U.S. tax gap, meaning the difference between total taxes owed and how much the IRS actually collects, is now estimated at anywhere between $600 billion and $1 trillion per year. According to one estimate cited by the Treasury Department, the top 1% of earners account for 28% of that gap.

“If somebody reports an income of $10,000 and they had $3 million go out of their checking account, that tells the IRS that’s an individual you might audit," Treasury Secretary Janet Yellen told CBS this month.

Still, the proposal received blowback from prominent figures on the Right who falsely claimed the IRS agents would be able to “snoop” through the public's everyday transactions. “This unprecedented expansion of government surveillance should leave everyone alarmed and outraged,” Senate Minority Leader Mitch McConnell wrote in local Kentucky paper the Courier-Journal earlier this month.

The following week, 19 Republican state attorneys general wrote to Yellen and Biden, echoing McConnell’s concerns and repeating the misleading information about searching individual transactions but going as far as calling the proposal “illegal.”

Banks have lobbied against the measure as well, arguing that it would be overly burdensome to them while also jeopardizing the security of customers’ private financial data. “If enacted, banks of all sizes will have to spend significant resources to capture and report this information to the IRS and customers,” said the American Bankers Association.

“The biggest cost to banks, however, would be the damage done to the bank-customer relationship,” the ABA continued. “Banks are trusted to safeguard customers’ money and information, and they take that responsibility seriously. This proposal threatens that trust by forcing banks to share account information with the IRS, which has repeatedly failed to protect the personal information of individual taxpayers in recent years.”

Wyden characterized the criticism from Republicans as “trying to protect their tax-cheating donors and allies” while also arguing that the concerns from banks were unjustified. “These institutions are already required to report just $10 of interest to the IRS — $10 of interest earned by each account,” he said. “So, the idea that adding two boxes to a form they already send to the IRS would end Western civilization just doesn’t hold up.”

Defenders of the Biden administration’s proposal have also noted that the IRS already knows how much many people who earn regular wages make each year, as the amount is reported on yearly tax forms.

“If you earn a paycheck, you get a W-2. The IRS knows about it,” Yellen said. “But high-income individuals with opaque sources of income that are not reported to the IRS, there's a lot of tax fraud and cheating that's going on.”

Still, the $600 threshold irked nonpartisan tax experts as well, who said the number was too low and would generate an excess of data on nonwealthy people that would be unhelpful in rooting out tax fraud.

“I don’t know why they thought $600 would be a good number,” John Koskinen, a former head of the IRS during both the Obama and Trump administrations, told the Washington Post. “$10,000 is definitely an improvement,” he said, adding that the figure should still be raised to about $50,000. “The vast majority of people won’t be affected, but it will pick up more than just the idle rich.”

Others noted the IRS’s budget cuts and how the agency would handle the influx of data. "Right now, the IRS clearly does not have the human and financial resources to do anything meaningful with an influx of a lot of information," Steve Johnson, a professor at Florida State University who specializes in taxes, told CNN.

But despite the higher threshold, Rosenthal, who used to advise wealthy clients on how to lessen their tax bills while practicing tax law in Washington, doubts the measure will be truly effective in identifying tax cheats. He said the IRS needs more agents with better training and that the tax code provides too many loopholes that the wealthy can exploit.

“Large businesses often are audited, and they're not omitting income,” he said. “They're not really in a position to hide their income because there are just too many investors and others for larger businesses to try to collude. They cheat in easier ways: aggressive tax reporting positions, all sorts of things, none of which cash flow reporting will help expose.”

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Tags: Business, IRS, Finance and Banking, Surveillance, Data, Economy, Congress, Democratic Party, White House, Wages, Wealth, Taxes, Privacy, Legislation

Original Author: Emma Loop

Original Location: Proposal for banks to report more information to the IRS continues to get pushback

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