Under the plan, banks and other financial institutions would be required to annually report customers’ account inflows and outflows of $600 or more to the IRS. The White House has estimated the policy, which would apply to bank, loan and investment accounts, could generate about $463 billion in additional revenue over the next decade.
The measure, if Congress approves it to fund Biden’s sweeping $3.5 trillion family and climate change plan, would give the IRS an enormous amount of new information that it would have to learn how to manage and use.
Banks banks say the plan would increase compliance costs and add to the already existing burden the industry faces in turning over information to the government.
In a letter addressed to House Speaker Nancy Pelosi and Minority Leader Kevin McCarthy, more than 40 banks urged lawmakers to vote against such a proposal, warning it could create a “tremendous liability” for all involved by requiring the collection of financial information for the majority of Americans “without proper explanation of how the IRS will store, protect, and use this enormous trove of personal financial information.”
“This proposal would create significant operational and reputational challenges for financial institutions, increase tax preparation costs for individuals and small businesses, and create serious financial privacy concerns,” they wrote. “We urge members to oppose any efforts to advance this ill-advised new reporting regime.”
Banks already report millions of transactions a day to the Financial Crimes Enforcement Network for any transaction that exceeds $10,000 – part of banks’ anti-money laundering requirements.
“Privacy concerns are cited as one of the top reasons why individuals choose not to open financial accounts and participate in the financial system,” the banks wrote. “This proposal would almost certainly undermine efforts to reach vulnerable populations and unbanked households.”
The letter was signed by dozens of industry groups, including the Mortgage Bankers Association, the National Bankers Association and the American Bankers Association.
The White House has defended the plans, saying it requires banks and financial institutions to provide a “little bit of high-level information” to the IRS on account flows in order to give the agency more information about wealthy Americans’ earnings from investments and business activity.
It has clarified that banks will not have to report individual transactions to the IRS, but rather “basic, high-level information on account inflows and outflows.”
“Imagine a taxpayer who reports $10,000 of income; but has $1 million of flows in and out of their bank account,” the administration said in a memo to congressional Democrats last week. “Having this summary information will help flag for the IRS when high-income people under-report their income (and under-pay their tax obligations).”
Still, a draft of proposed tax increased released by House Democrats at the beginning of the month allocates an extra $78 billion in funding for enforcement measures over the next decade, but notably does not include any new bank reporting requirements that the White House argues is necessary to crack down on tax evasion by high-earners and corporations.
Treasury Secretary Janet Yellen is urging Rep. Richard Neal, the chairman of the tax-writing House Ways and Means Committee, to include the full proposal to beef up IRS enforcement as it crafts the $3.5 trillion spending package. She argued that enhanced powers, along with additional resources, are required to shrink the tax gap – the shortfall between what’s owed and what’s paid.
“As you consider specific policy choices in designing an information reporting regime, it is important to ensure that the reporting regime is sufficiently comprehensive, so that tax evaders are not able to structure financial accounts to avoid it,” Yellen wrote. “Any suggestion that instead this reporting regime will be used to target enforcement efforts on ordinary Americans is wholly misguided.”