Politics

What’s inside the Treasury’s proposal to track nearly all bank accounts

As part of President Joe Biden’s plan to crack down on tax evasion by the wealthy, one proposal has proved incendiary: A plan to require banks to report to the Internal Revenue Service several new pieces of information from U.S. bank accounts. It has drawn condemnation from the finance industry and some lawmakers, while stoking fears among ordinary Americans that the government plans to monitor their day-to-day spending. 

Under a Treasury proposal issued in May as part of the agency’s budget request, banks would be required to note how much money went into and out of an account, excluding any account with less than $600 in flows annually or whose balance is under $600. Individual transactions won’t be listed, and officials have said it will not lead to more audits of middle-income Americans. 

Despite this, the proposal is still the subject of heated negotiation in Congress. Here’s what’s included in the plan — and what’s not. 

Totals, not transactions

The Treasury proposal would have banks 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.” Banks already report interest income over $10 on Form 1099-INT; this proposal would add a few lines to that tax document.

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Treasury officials have said that fears of stepped-up audits are unfounded, and the administration has pledged not to increase audits on people earning under $400,000 a year, but focus enforcement “on higher earners who do not fully report their tax liabilities.”

Officials emphasize the IRS would not learn about individual spending patterns — only total money going in or out.

“The proposal involves no reporting of individual transactions of any individual,” Treasury Secretary Janet Yellen told CBS Evening News’ Norah O’Donnell. “If somebody reports an income of $10,000 and they had 3 million [dollars] go out of their checking account, that tells the IRS that’s an individual you might audit.”

A low cutoff

The Treasury’s choice of a $600 level for reporting has caused pushback, with some Democrats in Congress proposing $10,000 as the threshold. 

But that initial low figure — coming after a new requirement, effective last year, for online sellers to report more than $600 of income to the IRS — has created the impression in some quarters that the government is out to get middle-income taxpayers for innocent mistakes.

The American Bankers Association, along with a slew of financial industry groups, claim that small business owners and independent contractors would bear the brunt of the proposal, not the wealthy. “While the stated goal of this vast data collection is to uncover tax dodging by the wealthy, this proposal is not remotely targeted to that purpose or that population,” the groups wrote last month.

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Taxpayers can be excused for thinking that. As the IRS’ enforcement capacity has dwindled with its shrinking budget, it has relied more and more on automated enforcement tools that catch lower-income taxpayers, with the result that the lowest-earning Americans are audited at higher rates than the richest. Combined with the IRS’ decades of staffing shortages, many fear that providing the agency more information will only allow it to make more mistakes. 

“You have an IRS that doesn’t answer a lot of its calls, if not most of its calls. You have an IRS that can’t even process paper returns, you have an IRS that can’t deal with questions that people have,” said Martin Davidoff, partner in charge of the tax-controversy practice at accounting firm Prager Metis.

“Now they’re going to automate enforcement for tens of millions of people, and they’re not going to have the personnel to respond to people’s concerns,” he said, paraphrasing the public perception of the Treasury proposal. 

Another element of the White House plan is raising the IRS budget by $80 billion, allowing it to hire more staff to both answer taxpayers’ questions and enforce the law.

It’s already the law

Supporters of the proposal note that it doesn’t actually require any new taxes — it merely allows the IRS to enforce the existing law.

“We are all supposed to pay income taxes on our income,” said Steve Wamhoff, director of federal tax policy at the Institute for Taxation and Economic Policy. “This idea that you have some sort of right to not tell the IRS about income you have — there is no such right. That doesn’t exist.”

He added, “We are literally talking about enforcing the law that is already on the books.”

The proposal is part of a suite of laws that would close the so-called information gap — taxes that the government doesn’t know to collect because of income that goes unreported. A vast amount of those unpaid taxes belongs to the wealthiest 1% of taxpayers  — by one estimate, $160 billion a year goes unpaid by this group. 


How wealthiest Americans pay little in taxes

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That gap exists partly because, unlike low- and middle-income workers whose income from employment, gig work and savings accounts is reported every year in W-2s and Form 1099s, wealthy people know they often don’t have anyone looking over their shoulder. The Treasury estimates that only about 50% of business income is reported, in contrast with employment income, where there’s near-perfect compliance.

“If you earn wages, the IRS can see exactly what you make, and garnish your wages,” said Megan Brackney, a partner at Kostelanetz & Fink. “For higher-income people, the IRS doesn’t have exact information of what they make, and it’s harder to collect tax they owe.”

“Middle-class and low-income taxpayers really suffer when there isn’t tax compliance, particularly among high-net-worth people. I would think that anyone of any political bent would want the wealthy to pay their fair share, not have an opportunity to evade tax.” 

Privacy at issue

While the ultra-wealthy have an array of tools at their disposal to avoid taxation — including trusts, limited liability corporations and partnerships that can cloak payouts — most of them do interact with the banking system. 

Said Martin Davidoff, “I have people with entire businesses they don’t report at all, and they just put it in their personal bank account.”

That’s another argument in favor of a relatively low reporting cutoff, some tax pros say. It’s not uncommon for many people to have more than one bank account, and a high threshold for reporting could make it easier to leave money out of sight.

Still, Republicans and some Democrats are pushing back on the proposal. Senate Minority Leader Mitch McConnell called it a “massive new dragnet,” while Nebraska’s state treasurer has said he won’t comply with the requirement if it becomes law.

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