The Biden administration wants the IRS to take a closer look at people’s bank accounts – will it catch tax cheats or invade privacy?
In the ongoing debate over tax hikes for the rich and multibillion-dollar government spending on the social safety net, a much smaller dollar amount is getting a lot of attention.
A proposal from the Biden administration calls for monitoring of people’s accounts by the Internal Revenue Service to start at $ 600.
Specifically, the administration wants to require financial institutions to notify the IRS of aggregate “inflows” and “outflows” from bank accounts, loans and investments, according to Treasury Department documents. The rule would apply to both personal and business accounts, but it would not involve passing transaction-level details to the IRS. Reporting would be done on an annual basis and the reporting threshold would be $ 600 – a level that could rise in Capitol Hill give-away if the idea becomes law.
“This proposal would create a comprehensive financial account information reporting regime,” the Treasury Department said in May. Since then, people like Treasury Secretary Janet Yellen have championed the idea, saying it could serve as a valuable data point in the administration’s quest to ensure that wealthy taxpayers pay their full amount. tax.
Dealing with wealthy households who may have “opaque” or “hidden” sources of income, Yellen told CNBC on Tuesday that “a simple way for the IRS to get a feel for where this might be n is just some information on personal bank accounts, nothing at the transaction level that would violate privacy.
Banks already have to report to the IRS when accounts accumulate interest over $ 10, she noted.
It’s not that simple, say critics, who range from banking to privacy advocates.
The reporting requirement would be a burden on ordinary taxpayers, not a target for the rich, they say. The offer of more information amassed by financial companies and gathered by the IRS could also be problematic in an age of identity theft and data breaches, some note.
âWhile policymakers insist this provision targets high income earners, it applies to almost all Americans with a bank account. This is bad public policy and should be rejected, âaccording to a letter last month from the American Bankers Association and state banking associations to leaders in Congress.
Some banks don’t just report the idea to Congress, they also let customers know about their concerns. For example, Capital City Bank, a bank with branches in Florida, Georgia, and Alabama, posted their concerns on Facebook FB,
last month, saying the idea “will invade consumer privacy, increase the cost of tax preparation for small businesses and create unnecessary and costly burdens on banks.”
The fate of the proposal is far from certain. If it becomes law, the threshold could rise to $ 10,000 in gross flows, according to the Wall Street Journal.
“We’ve made a significant move on the numbers,” said Representative Richard Neal, a Democrat from Massachusetts who chairs the Ways and Means Committee, late last month, according to Bloomberg. (Spokesmen for Neal and the Ways and Means Committee could not be reached for comment.)
“An unprecedented amount of information on taxpayers”
There is a link between the amount of information the IRS has about a person’s sources of money and the amount the person pays in taxes, according to Treasury Department officials.
The hard-to-assess income streams come from sources such as property and partnership income, which also appear more often with wealthy taxpayers, wrote last month Natasha Sarin, the Treasury Department’s deputy assistant secretary for economic policy.
When these âopaqueâ revenue sources are mixed, the rate of non-compliance can reach around 55%, she said. For taxes based on income from wages and salaries, “compliance with tax obligations is almost perfect (non-compliance rate of 1%),” she wrote.
So the IRS wants more eyes in more places to spot more trends, such as large inflows or outflows that might not be reflected on a tax return. This general idea is already on display in the proposed cryptocurrency BTCUSD,
tax reporting rules in the bipartite infrastructure bill. The rules were passed over objections from people in the crypto industry.
In this case, people who regularly offer services that perform digital asset transfers should report transactions to the IRS in the same way brokers currently do for stock and bond transactions. Businesses should also report digital asset transactions over $ 10,000 to the IRS.
An average person lower on the income scale isn’t who the IRS is looking for – but critics say these people would be roped up anyway. A person earning $ 18 an hour by paying rent and living expenses would have about $ 60,000 in combined entry and exit, according to the American Bankers Association.
“We continue to believe that this proposal puts the privacy and security of financial information at risk for nearly all US account holders,” said John Kinsella, vice president of tax policy for the trade association. “This would trigger an unprecedented amount of taxpayer information, most of which will not be relevant to calculating taxable income, with significant costs and data security risk for 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. In the 2018 tax year, the IRS processed more than 3.5 billion “information return” documents, according to a report by the United States Government Accountability Office at the end of the year last.
“A really critical part of the compliance effort”
There is a balance lawmakers must strike, according to Chye-Ching Huang, executive director of the Tax Law Center at New York University. Potentially higher thresholds could be missing on many accounts that move money, far from the IRS’s perspective, she said.
But reports of smaller-value accounts will not trigger audits for people with net worth less than $ 400,000, Huang said. The idea is to use the reports over the years as a building block to see if a wealthy person’s tax returns add up or don’t add up.
Even though some critics see the rules as attacking transaction data, it doesn’t, she said.
“They are asking for a very narrow set of information,” said Huang, calling the proposal “a really critical part of the compliance effort.”
Regarding implementation concerns, Huang called this “overkill,” noting that financial institutions already have to provide documents such as 1099-INT for interest income.
Another concern about the $ 600 in / out reporting requirement is also about confidentiality and sources of money that are scrutinized.
For example, it’s not clear whether fintechs like Cash App would be covered by the rules, according to Alan Butler, executive director and chairman of the Electronic Privacy Information Center.
âOther accounts with similar characteristics to financial institution accounts will be covered by this reporting regime,â Treasury Department documents said in May. Cash App did not respond to a request for comment.
But more reports could mean more chances for things to go wrong or for violations to occur, he said.
Butler said he was not completely opposed to the reporting requirements, but if he had, the threshold would be a higher amount, only for business accounts – and if personal accounts were to be reported. , the threshold number should be higher.
âIf you’re going to impose a new system, additional exposure of people’s financial information and a significant reporting burden, you better justify it,â he said. The rationale is to narrow the tax gap, but inflow and outflow data over $ 600 won’t, Butler said.
“We are simply asking for two additional pieces of information”
When some critics hammer home the privacy concerns, they say investigative newspaper ProPublica is getting tax information on powerful figures like Amazon AMZN,
founder Jeff Bezos.
In a Senate hearing last month, Sen. Bill Hagerty, a Republican from Tennessee, said the ProPublica articles were a serious vote of no-confidence on the IRS’s ability to protect sensitive information.
âProtecting taxpayer information is the top priority of the Internal Revenue Service,â Yellen replied, noting that the source of the ProPublica information was under investigation and it was not even established that the information even came from the IRS.
âWe are talking about a small amount of information, not all transactions under $ 600,â she said, according to a transcript. “We’re just asking for two more pieces of information, the aggregate entries and exits of the account during the year.”