Despite mounting blowback to the Internal Revenue Service (IRS)’s “improving tax enforcement” proposal to track bank inflows and outflows exceeding $600, Treasury Secretary Janet Yellen is doubling down by calling the process “routine.”
“Well, of course they do,” Yellen said on CBNC Squakbox Tuesday. “Right now, on every bank account that earns more than $10 a year in interest, the banks report the interest earned to the IRS. That’s part of the information base that includes W2’s and reports on dividends in other income that taxpayers earned. So collection of information is routine.”
Yellen Doubles Down on IRS Proposal
The Treasury Secretary claimed an alleged “enormous tax gap” is the impetus behind this push to gain access to our private bank account information.
“But there’s an enormous tax gap in the United States, estimated at $7 trillion over the next 10 years in terms of the shortfall of tax collections to what we believe are owed, and that, that’s not coming from people failing to report wage income or dividend income where there’s good information,” as Yellen noted. “It comes from places where the information on income is opaque and can be hidden. And 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, simply aggregate inflows into the account over the year and aggregate outflows and that would really help the IRS target their auditing resources which we’ve proposed to greatly expand to do their audits on those usually high-income wealthy individuals that may be concealing their, their transactions and their income and these would be helpful indicators of where it would make sense for auditing to occur.”
She added, “So, it is not reporting of individual transactions or anything of the like, and it would be a simple thing for banks and other payment providers to provide along with the other information they’re already providing.”
Congressional Republicans and banking representatives, however, see it differently.
“This proposal represents a radical departure from existing reporting requirements associated with national security and actual taxable events,” Republican senators wrote in a letter. “Placing more requirements on financial institutions would not only adversely affect these institutions and their customers – who ultimately pay the price for compliance costs – but it would also inundate the IRS with layers of new paperwork and taxpayer data that is either redundant or irrelevant to improving federal tax compliance, as account inflows and outflows are not taxable events. Simply flooding the IRS with more data and burdening taxpayers, financial institutions, and already overwhelmed IRS service centers with more paperwork is of questionable value, especially when the IRS does not effectively use data already in its possession.”
“This plan would force banks to develop a costly new system to provide private financial data on almost every taxpayer to the IRS, not just those suspected of cheating on their taxes. It’s not clear the IRS could even process and protect all that information. Perhaps most troubling of all, it risks driving people away from the banking system and all the economic benefits that come from having a bank account. We urge Congress to reject this bad idea,” said Rob Nichols, president and CEO of the American Bankers Association.
Consumers Strongly Disapprove of IRS Having Access to Private Data
The Independent Community Bankers of America (ICBA), an organization advocating on behalf of the community banking industry, recently released a poll in conjunction with Morning Consult.
The majority of respondents, 67% of voters, oppose the IRS proposal with 53% of respondents strongly opposed. Only 22% of respondents supported it.
Moreover, there was bipartisan opposition to the proposal with 51% of Democrats, 74% of Independents, and 79% of Republicans opposed.
When respondents were polled about the IRS gaining more access to their private banking info, 64 percent of respondents say they distrust the agency monitoring their private account information. Adding insult to injury, 54 percent of respondents said the agency won’t keep their financial data secure. ICBA added, “Distrust is highest among voters over the age of 45, those who make under $100,000 per year, and those in suburban and rural areas.”
“Mandating broad new bank reporting to the IRS on all business and personal bank accounts would infringe on the privacy of bank customers,” IBCA President Rebecca Rainey said. “It would also push more people away from a banking relationship and overload the IRS with more data than it can possible process or keep safe.”
“This proposal is deeply concerning for America’s credit unions and their 120 million members,” remarked Jim Nussle, president and CEO of the Credit Union National Association. “Not only would the regulatory burden create an outsized impact on credit unions serving rural communities, but it raises serious privacy concerns for every consumer in the country. From the massive 2014 data breach at the Office of Personnel Management to this year’s IRS leak of federal tax returns, the federal government’s checkered history of warehousing personal data underscores the dangerous impracticality of this policy proposal.”
“As some interpret this information reporting proposal effectively to require banks to police and report on the accounts of customers, we are very concerned that it will undermine trust in the banking system and erode the progress we have made reducing the number of unbanked and underbanked in the country, ” the American Banking Association said in a statement.
Reuters warned this new surveillance program could incur Fourth Amendment violations.
At some point, the coming financial surveillance regime may cross the line between reasonable information requests and unreasonable seizure of private financial records. The shift from analog fiat money to central bank digital currency, with its potential for real-time government scrutiny of citizens’ cash flows, raises the stakes. Biden’s proposal, if made law, may wind up before the Supreme Court.
The publication also warned the IRS possessing more data won’t lead to greater tax compliance.
There may be other ways to increase tax compliance. The Government Accountability Office found last year that the IRS’ ability to use and process information was limited by outdated systems and a lack of coordination with other agencies. That implies it might achieve higher collections by better using the powers it has – but hardly suggests more data would increase compliance. In other words, the benefit in terms of revenue is speculative, while the cost in risk to taxpayers is fairly certain.
In response to sweeping backlash to monitor bank account inflows/outflows exceeding $600, Democrats have proposed upping it to $10K. But that didn’t assuage concerns from those in the banking community.
The American Banking Association believes the revised proposal is still invasive and broad.
“Even with the modifications announced today, this proposal still goes too far by forcing financial institutions to share with the IRS private financial data from millions of customers not suspected of cheating on their taxes,” said Rob Nichols, ABA’s president and CEO. “The exclusion of payroll and federal program beneficiaries does not address millions of other taxpayers who would be impacted by the proposal.”
All Americans, regardless of income tax bracket, will be equitably affected by this misguided policy if it were to pass as part of the $3.5 trillion budget bill negotiations.