WASHINGTON – Brawl over Biden administration proposal to use bank account data to fight tax evasion focuses on extent to which plan will increase banks’ compliance burden and threaten privacy of their customers.

The banks and their lawyers say the proposed measure – a key part of how the administration wants to pay the $ 3.5 trillion reconciliation bill – could give the government insight into private customer transactions, while the statement expanded would impose new processing costs on industry.

“We believe this program is costly for all parties, is not fit for purpose and is fraught with unintended and serious negative consequences,” 40 trade associations, including industry groups, wrote on Friday. bank, in a letter.

But supporters of the plan to narrow the “tax gap” between taxes owed and paid – including the Treasury Department, former Internal Revenue Service officials and others – say banks are dramatically exaggerating potential fallout.

The suggestion that banks report transaction-level data to the Internal Revenue Service “is a misrepresentation,” said Charles O. Rossotti, former IRS commissioner.

Rossotti said the plan would simply expand an already existing reporting framework by adding new data points. Banks already have to provide 1099 forms on the amount of interest income that a customer has accumulated on an account.

“The proposal adds two digits to a Form 1099: total deposits and total withdrawals,” Rossotti said. “There is no transaction data; there is no detail on individual transactions.”

The financial services industry has fought vigorously since the spring to stop the proposal, but the measure requiring the reporting of accounts with more than $ 600 in annual inflows or outflows is currently under consideration in the Senate.

A companion bill introduced by the House Ways and Means Committee did not include the proposed report, but sources say an agreement could be on the way to possibly link the measure with the revival of the national and local tax deduction – a victim of the Trump-era tax changes that had greatly benefited homeowners living in the most expensive areas of the country.

On Wednesday, Treasury Secretary Janet Yellen wrote to Ways and Means Committee Chairman Richard Neal, D-Mass., urging the House to include the measure in its version of the budget plan.

An editorial published in American Banker by Senator Mike Crapo, the top Republican on the Senate Finance Committee, argued that the proposal was “a huge violation of privacy” and “a flagrant abuse of Americans’ due process by inferring that all American taxpayers are guilty of tax evasion until proven guilty.”

“This surveillance net will capture every American – of all income levels – with a bank, credit union, brokerage or financial account,” Crapo wrote.

But progressives say banks and Republican opponents of the plan are indulging in fear. They say the information provided by the banking industry would be useful for the IRS to coordinate tax audits and ensure high net worth taxpayers report their investment and business income.

“Once something is easily demagoguery, it becomes more and more important as the process progresses,” said Seth Hanlon, senior researcher at the Center for American Progress. “The proposal requires a small amount of non-invasive information on the front-end to avoid unnecessary, but very intrusive, audits on the back-end.”

The letter from industry trade groups to House Speaker Nancy Pelosi and Minority Leader Kevin McCarthy urged Congress to reconsider tax reporting requirements.

“While the stated goal of this vast data collection is to uncover tax evasion of the wealthy, this proposal does not remotely target that goal or that population,” wrote business associations, including the American Bankers Association. , Independent Community Bankers of America, Association of Consumer Bankers and Electronic Transactions Association.

“In addition to significant privacy concerns, it would create enormous liability for all parties involved in requiring the collection of financial information for almost all Americans without a proper explanation of how the IRS will store, protect and use this enormous treasure. personal financial information. ”the groups wrote.

Rossotti suggested that the industry’s biggest fear – rather than compliance costs or privacy concerns – might be that the proposal will work as intended, putting banks in the awkward position of playing a pivotal role in cracking down on the government against tax evasion.

“There are people who do not pay a substantial amount of taxes regularly, every year, for many years. And now with this report it’s going to be very difficult to avoid that, ”Rossotti said. “And it’s the banking reports that are going to be at the heart of making this happen, right?” They want to get out of the line of sight.

The reporting plan first offers by the administration in May as a way to close the tax gap would require a “breakdown of physical cash, transactions with a foreign account and transfers to and from another account with the same owner,” according to the Treasury Department.

The Biden administration’s argument is that a better funded IRS with stronger tax data would have a much easier time identifying systemic tax avoiders and reducing unnecessary tax audits.

The nonprofit investigative newsroom ProPublica discovered that misplaced audits Low-income families disproportionately targeted in 2019. Meanwhile, the Treasury Department estimates that 28% of all unpaid taxes are owed by the richest 1% employees.

According to analysis of IRS data on tax year cycles from 2011 to 2013, underreported income is the main culprit for hundreds of billions of dollars in underpaid taxes, accounting for 38% of the gross tax gap.

But the proposal has been fiercely opposed by the banks from the start. ICBA claimed on its website the proposal would require banks to “report virtually all information and activity on their customers’ bank accounts to the IRS regardless of customer consent.”

“The idea that now you’re going to be looking for even more data from individuals, regardless of their tax liability or any suspicious activity, is really a trickle, and I don’t think members of Congress want to go there,” he said. Paul said. Merski, executive vice president of congressional relations and strategy at ICBA.

Industry representatives also point out that the emergence of IRS surveillance of customer bank accounts may undermine efforts to expand access to the financial system, especially for marginalized communities.

“Privacy concerns are cited as one of the main reasons why individuals choose not to open financial accounts and participate in the financial system,” the letter from the business groups said on Friday. “This proposal would almost certainly undermine efforts to reach vulnerable populations and unbanked households.”

But Hanlon said the banks themselves were responsible for stoking this fear.

“If they are concerned about this, they should stop grossly misrepresenting the proposal,” Hanlon said. “So many transactions are already reported to the IRS. If people had the full context of what a small reform is, it wouldn’t have any impact.

Yet, many Americans just don’t trust the IRS in general. The agency is not particularly popular and was continued by insufficient funding, accusations of political pressure and high level data breaches for years.

“The IRS is absolutely incapable of handling or processing this huge amount of new data, and they would admit it – that’s why they’re asking for an additional $ 80 billion in this budget,” Merski said.

Merski also suggested that the government may not stop asking for basic data on exits and entries. “The real fear is that they are going to ask the banks to then provide additional details about someone the IRS is profiling or has reported. [using the new bank reporting requirements], and then they’ll say, ‘Well, we want the specific transactions,’ ”he said. “He’s not an innocent [proposal] just trying to close the tax gap. It would be a historic invasion of financial privacy like we have never seen before. “

In a statement, a Treasury Department spokesperson rebutted claims that Biden’s proposal had anything to do with individual transaction data.

“This proposal does not require you to report individual transactions to the IRS. The president’s proposal requires banks to report the most basic and high-level information on inflows and outflows, ”the Treasury spokesman said. “This will help the IRS target its enforcement activities on those who genuinely evade their tax obligations, which will reduce costly and burdensome audits for the vast majority of taxpayers who pay what they owe.”

Still, some analysts argue that the reporting requirements would be a real financial burden, especially for community banks. Jaret Seiberg, managing director of the Cowen Washington Research Group, wrote in a recent brief that the proposal was “the definition of an unfunded mandate.”

“It is one thing to require the reporting of transactions of at least $ 10,000. It’s another to go as low as $ 600, ”Seiberg wrote. “We suspect this results in a one-time fee for banks when they review customer account agreements. It will also increase administrative costs on an annual basis as banks report the required data. “

But proponents of the proposal say the costs to banks would be marginal compared to the potential benefits of a more robust tax collection system.

“Should we continue with the current system, where the quality of IRS audit selection isn’t even close to what it should be, or could be, meaning ordinary people are unnecessarily audited?” Hanlon said. “It’s a choice between that or a little common sense reform.”


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