Letting the IRS Into Your Bank Account: Separating Fact from Fiction

By John Kinsella
ABA Viewpoint

As the congressional debate over the Biden administration’s Build Back Better agenda continues on Capitol Hill, public opposition to one proposal that would have a significant effect on banks and their customers is growing. To reduce the tax gap, the administration proposes to require financial institutions to share annual inflow and outflow data on almost every account holder in the country.

Given the sweeping nature of the proposal and the impact it would have on everyday Americans, not just those suspected of cheating on their taxes, the public opposition is not surprising. What has been surprising is some of the misinformation being shared by supporters, especially given the limited detail the administration has provided.

Contrary to commentary that refers to an official bill, amendment or provision, the administration has not shared any actual legislative text. The only written description is from Treasury’s “Green Book” and is reproduced below:

This proposal would create a comprehensive financial account information reporting regime. Financial institutions would report data on financial accounts in an information return. The annual return will report gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner. This requirement would apply to all business and personal accounts from financial institutions, including bank, loan, and investment accounts, with the exception of accounts below a low de minimis gross flow threshold of $600 or fair market value of $600. (Emphasis added)

Over the past several weeks, ABA and others who have advocated against this proposal have been criticized by various supporters for taking a stand against a proposal that our members, the small business community and millions of bank customers believe to be an unfair overreach that will have significant negative consequences. These statements include implications that we are advocating for “tax cheats,” providing misinformation ourselves and exaggerating the difficulties banks will face in implementing this proposed regime. Nothing could be further from the truth.

Focus on the real problem

ABA firmly believes taxpayers should pay what they owe. To suggest otherwise is false. If there are opaque sources of revenue, let’s focus on addressing that challenge head-on rather than over-collecting information from everyone in the hope that it shines a light on a small number of tax cheats. The IRS currently has significant tools to target those suspected of evading taxes without having to rely on this blunt instrument that will capture the personal financial data of millions of Americans not suspected of tax avoidance.

A slippery proposal

From the beginning, ABA’s advocacy has been based on the proposal above. We read it on its face and received feedback from bankers and their customers. It’s the only proposal we—or anyone outside the negotiations—has to go on and it largely conforms to statements of administration representatives we have spoken to. Our public and private concerns have been consistent since the publication of the Green Book. They include concerns about the large amounts of information that would be created and stored, including related concerns about data security and privacy, the disconnect between the proposal’s narrow purpose and its wide and deep reach, the likely inability of the IRS to effectively manage and use this information, the additional cost to taxpayers to evaluate this information with their tax preparers and the significant operational challenges for financial institutions grappling with a reporting regime that will be complicated and costly to implement, especially for smaller institutions. We also have concerns this proposal could damage the hard-earned trust customers have in their financial institutions to keep their personal information safe and secure.

Media reports and draft summaries floating around Congress suggest the proposal may be changed, with a higher de minimis threshold and perhaps exclusions and carveouts to pare back the program’s scale. In fact, one set of talking points from supporters suggest the original proposal, pasted above, is itself a “myth.” If there is a new proposal to consider, it should be shared publicly for all to see its real implications. Until then, we will continue to raise the legitimate and valid concerns shared by our members, and more importantly, by their customers who continue to express growing opposition to the proposal.

We welcome a debate on the merits of any proposal, but take exception to the suggestion that any banker, bank customer, or small business owner that has even a minimal expectation of privacy and opposes this program must be a tax cheat. This country has a long, honorable history of challenging blanket government data collections with narrow or poorly defined objectives. Given its wide reach, this proposal deserves that same scrutiny.

Discerning the details

Given the complexity of the proposal and the lack of detail to date beyond the Green Book, there has been confusion by some about the definitions of transaction detail versus annual gross inflow and outflows. We believe this should not detract from the core concerns regarding privacy and other issues. That said, requiring information on account transfers, breakdown of cash and other factors might be considered by some to be transaction detail, and as more carveouts are discussed (for example, deposits from payroll companies), the more data sent to the IRS will resemble specific, detailed transactional information.

The proposal calls for a significant amount of additional data to be collected. Certain words and phrases are italicized above. To suggest that the proposal is simple or is targeted at the wealthy is simply false. In fact, recent statements from policymakers suggest that the proposals would indeed affect a wide swath of taxpayers; and are even targeted at small business owners.

Administration officials have made statements that implementing this proposal would be simple and amount to adding a couple of boxes on Form 1099-INT. Based on the Green Book language above, these statements indicate a lack of appreciation for existing information reporting processes and requirements and the significant extent of new reporting this proposal would require. In fact, a recent New York Times article indicated that Treasury officials are “flummoxed” by the concerns raised by the banking industry. Based on meetings we have held with Treasury and other policymakers—plus the significant amount of information provided based on banker input—we are flummoxed that policymakers somehow heard that this proposal is simple and that any compliance costs would be minimal. That is simply not the feedback provided by our members. It also doesn’t pass the commonsense test given the millions of accounts that will be captured by this proposal.

We appreciate that there may be differences in views as policies are debated, and we acknowledge the public’s interest in reducing the tax gap. We firmly believe, however, that this proposal goes too far and judging from the public reaction to date, many Americans agree. We will continue to share our perspective in good faith and provide fact-based input from our members and their customers that can help the administration and Congress reach the right decision.

Simply put: This proposal is not the way to address this problem. Many law-abiding, taxpaying citizens of this country agree, and as more Americans learn the details, we expect that number will grow.

John Kinsella is VP for tax policy at ABA.