Biden wants IRS to monitor people’s bank accounts more closely — will it catch tax cheats, or invade privacy?

In the ongoing debate over tax hikes for the rich and multi-trillion dollar government spending on the social safety net, a much smaller dollar amount is catching a lot of attention.

A Biden administration proposal calls for Internal Revenue Service monitoring of people’s accounts to kick in at the $600 mark.

Specifically, the administration wants to require financial institutions tell the IRS about the aggregated “inflow” and “outflow” from bank, loan and investment accounts, according to Treasury Department documents. The rule would apply to personal and business accounts, but it would not involve handing transaction-level details over to the IRS. The reporting would be done on an annual basis and the threshold for reporting would be $600 — a level that could increase in the Capitol Hill give-and-take if the idea becomes law.

“Yes, there are concerns that some people have,” Nancy Pelosi, speaker of the Democrat-controlled House of Representatives, said Tuesday. “But if people are breaking the law and not paying their taxes, one way to track them is through the banking measure. I think $600, but that’s a negotiation that will go on as to what the amount is.”

Back in May, the Treasury Department said, “This proposal would create a comprehensive financial account information reporting regime.” Since then, people such as Treasury Secretary Janet Yellen have defended the idea, saying it may serve as a valuable data point in the administration’s quest to make sure rich taxpayers pay their full tax tab.

Dealing with wealthy households that may have “opaque” or “hidden” income sources, Yellen told CNBC earlier this month that “a simple way for the IRS to get a sense of where that might be is just a few pieces of information about individuals’ bank accounts, nothing at the transaction level that would violate privacy.”

Banks already have to report to the IRS when accounts accrue interest above $10, she noted.

It’s not so simple, say critics, who range from the banking sector to privacy advocates.

The reporting requirement would be a dragnet for regular taxpayers, not a target on the rich, they say. The proposal for more information amassed by financial firms and gathered by the IRS might also be asking for trouble in an age of identity theft and data breaches, some note.

“While policymakers insist this provision is aimed at high income earners, it sweeps in almost any American with a bank account. This is bad public policy and should be rejected,” according to a letter last month from the American Bankers Association and state bankers associations to Congressional leaders.

Some banks aren’t just denouncing the idea with Congress, they’re letting customers know about their worries too. For example, Capital City Bank, a bank with branches in Florida, Georgia and Alabama, posted its worries on Facebook

last month, saying the idea “will invade consumer privacy, raise the cost of tax preparation for small businesses and create unnecessary and expensive burdens for banks.”

The proposal’s fate is far from certain. If it becomes law, the threshold may reportedly rise to $10,000 of gross flows, according to the Wall Street Journal.

“We’ve made some significant movement on the number,” Rep. Richard Neal, a Democrat from Massachusetts who chairs the Ways and Means Committee, said late last month, according to Bloomberg. (Spokespeople for Neal and the Ways and Means Committee could not be reached for comment.)

‘An unprecedented amount of taxpayer information’

There’s a link between how much information the IRS has on a person’s money sources and how much the person pays in taxes, according to Treasury Department officials.

Tough-to-gauge income streams come from sources like a proprietorship and partnership income, which also happen to pop up more often with rich taxpayers, Natasha Sarin, the Treasury Department’s deputy assistant secretary for economic policy, wrote last month.

When these “opaque” income sources are in the mix, the rate of noncompliance can reach an estimated 55%, she said. For taxes based on wage and salary income “compliance with income tax liabilities is nearly perfect (1 percent noncompliance rate),” she wrote.

So the IRS wants more eyes in more places to spot more trends, such as large sums going in or out that might not be reflected on a tax return. That general idea is already on display in proposed cryptocurrency

tax reporting rules within the bipartisan infrastructure bill. The rules made it in, over objections from people in the crypto industry.

In that case, the people who regularly offer services executing digital asset transfers would have to report the transactions to the IRS in the same way that brokers have to do now with stock and bond trades. Businesses would also need to report to the IRS on digital asset transactions above $10,000.

An average person farther down the income scale isn’t who the IRS is after — but critics say these people would get roped in anyway. A person making $18/hour paying rent and living expenses would have around $60,000 in combined inflows and outflows, according to the American Bankers Association.

“We continue to believe this proposal jeopardizes the privacy and security of financial information for nearly every U.S. account holder,” said John Kinsella, vice president of tax policy at the trade association. “It would trigger an unprecedented amount of taxpayer information, most of which will be irrelevant to calculating taxable income, with significant cost and data security risk to taxpayers.”

The organization strongly supports tax compliance, Kinsella said, but there’s a better way to do it using the resources and information the IRS already has. During tax year 2018, the IRS processed over 3.5 billion “information return” documents, according to a United States Government Accountability Office report late last year.

‘A really critical part of the compliance effort’

There is a balancing act lawmakers have to strike, according to Chye-Ching Huang, executive director of New York University’s Tax Law Center. Potentially higher thresholds might miss out on many accounts moving money around, far from IRS view, she said.

But reports from smaller value accounts aren’t going to trigger audits for people with smaller net worths below $400,000, Huang emphasized. The idea is to use the reports over years as one building block when seeing if a rich person’s tax returns do or don’t add up.

Even if some critics cast the rules as prying into transaction data, that’s not the case, she said.

“They are asking for a very narrow set of information, Huang said, calling the proposal “a really critical part of the compliance effort.”

As for the worries on implementation, Huang called that “overblown,” noting financial institutions already have to supply documents like the 1099-INT for interest income.

Privacy worries?

Another concern on the $600 inflow/outflow reporting requirement also centers on privacy, and which money sources come under the microscope.

For example, it’s not clear if fintechs like Cash App would be covered by the rules, according to Alan Butler, executive director and president of the Electronic Privacy Information Center.

“Other accounts with characteristics similar to financial institution accounts will be covered under this information reporting regime,” said the Treasury Department materials from May. Cash App did not respond to a request for comment.

But more reporting could mean more chances for things to go wrong or breaches to occur, he said.

Butler said he’s not completely opposed to reporting requirements, but if he had it his way, the threshold would be a higher amount, just for business accounts — and if personal accounts had to be reported, the threshold number would have to be higher.

“If you are going to impose new system, a further exposure of people’s financial information and a major reporting burden, you better justify it,” he said. The rationale is narrowing the tax gap, but data on inflows and outflows above $600 isn’t going to do it, Butler said.

‘We’re just asking for two additional pieces of information’

When some critics hammer on the privacy issues, they point to the investigative news outlet ProPublica obtaining tax information of the high and mighty like Amazon

founder Jeff Bezos.

During a Senate hearing last month, Sen. Bill Hagerty, a Republican from Tennessee, said the ProPublica stories were a serious vote of no confidence on the IRS’ ability to safeguard sensitive information.

“Protecting taxpayer information is the highest priority of the Internal Revenue Service,” Yellen responded, noting the source of the ProPublica information was under investigation and it wasn’t established that the information even came from the IRS.

“We’re talking about a small amount of information, not every transaction that’s less than $600,” she said, according to a transcript. “We’re just asking for two additional pieces of information, aggregate inflows and aggregate outflows from the account during the year.”

Victor Reklaitis contributed to this report.

This story was updated on Oct. 12.

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