Controversial IRS proposal is cut
President Biden’s $1.75-trillion Build Back Better spending plan unveiled Oct. 28 includes many agenda items that Democrats hold dear, ranging from expanded child care to unprecedented support for green energy.
But one proposal that got left on the cutting-room floor was a controversial plan to supply the Internal Revenue Service with more information on Americans’ banking transactions.
A Treasury Department proposal put forth earlier this year was designed to track aggregate deposits and withdrawals flowing in and out of millions of personal and business financial accounts. The goal was to chip away at the nation’s tax gap, which is estimated at $600 billion annually. The gap reflects what Americans are legally supposed to pay — but don’t.
While wealthy tax cheats were the target, critics say this proposal might have posed problems for middle- and lower-income Americans, too. The controversial plan raised concerns about privacy and overreach by the IRS.
The backlash didn’t subside even after the Treasury in early October narrowed the scope of the proposal to apply to bank and other financial accounts with balances of $10,000 and more, up from a $600 balance threshold initially. A recent letter signed by 21 Democratic members of Congress opposing the plan might have sealed its fate.
Yet up until the end, administration officials were digging in, trying to counter what they claimed was a misinformation campaign funded by specialinterest groups.
What was in the deleted proposal?
The Treasury Department originally wanted banks, credit unions and other providers of financial services to submit information to the IRS about total inflows and outflows of all accounts with a balance above $600.
As noted, amid criticism, that was changed to accounts with balances of $10,000 and up. Treasury officials insisted the IRS wouldn’t receive details on individual transactions but, rather, gross inflows and outflows.
The Treasury also pledged to exempt certain types of inflows or outflows including wages, salaries and monthly Social Security and pension deposits.
The idea was to give the IRS a sense of why some taxpayers reporting modest income might show hundreds of thousands or even millions of dollars in transactions. A person reporting, say, $80,000 in taxable income with an account showing $40,000 in annual inflows might not spark much scrutiny, but someone claiming $80,000 in income with $10 million in deposits might. That could have raised a red flag for an IRS audit.
Increasing the threshold to $10,000 would have excluded most wage earners, said Natasha Sarin, a deputy assistant secretary at the Treasury Department who discussed the proposal Oct. 26 in a forum hosted by the Committee for a Responsible Federal Budget.
She estimated Americans have a median bank balance of around $2,000.
Why was the proposal controversial?
There were many reasons the proposal became a lightning rod.
Critics asserted that it would have allowed the government to peek into the financial transactions of virtually all Americans, despite the insistence of Treasury officials that only aggregate deposits and withdrawals would be tracked and, as noted, only for accounts with balances above $10,000.
In addition, there were doubts over whether the IRS could adequately safeguard all that data, especially in light of the leak earlier this year of tax records for 25 wealthy Americans, as publicized in reports by ProPublica.
Privacy concerns were cited in the letter signed by 21 Democratic members of Congress who opposed the plan.
“The data that would be turned over to the IRS is overly broad and raises significant privacy concerns,” the letter stated. “We have little information about how the IRS plans to protect or use this massive trove of data.”
Impact on financial firms
Banks, credit unions, mortgage services and other financial entities also were cool to the idea. They faced more work and responsibilities, although how much more was a matter for debate.
The Treasury Department noted that financial firms already have access to this information.
The companies would have reported the additional data on an expanded Form 1099-INT. Treasury Secretary Janet Yellen said the forms would include one box for total deposits or inflows and one box for total withdrawals or outflows.
Banks, credit unions and other financial entities are highly sophisticated in their information technology capabilities and could have handled it, Sarin said.
Yet financial firms didn’t see it that way.
“There are a variety of (codes) to identify those payments,” said Ryan Donovan, an executive vice president with CUNA, the Credit Union National Association, in reference to wages. “There isn’t a universal way to identify them.”
For example, direct deposits of wages might be straightforward, he said in an interview, but what about paper checks or company reimbursement of employee expenses, not to mention income coming in piecemeal from gig workers?
Another worry was that the proposal might have undermined efforts to reduce the number of unbanked Americans — people lacking conventional accounts who rely instead on payday loans, check-cashing outfits and other high-cost alternatives.
“A proposal like this does so much to set back these efforts,” Donovan said. “It discourages people who already are skeptical about banks and the government.”
So what happens now?
Biden’s spending plan left out the heightened bank-transaction reporting requirement, but it still includes other measures to beef up the IRS, raise more revenue from the wealthy and narrow the tax gap. The plan also would upgrade the agency’s antiquated computer systems, some elements of which date to the 1960s, Sarin said.
The administration contends that regular wage and salary workers pay nearly all of the taxes they owe, with a 99% compliance rate, largely because their income numbers are reported by employers and other third parties on tax forms.
In contrast, certain wealthy Americans may hide some of their income. “Opaque” income sources for which there is no third-party reporting include proprietorships and partnerships, said Sarin, who described the issue as fundamentally one of fairness.
The Build Back Better agenda asserts that the nation’s top 1% of earners are responsible for more than $160 billion in tax evasion annually.
The Administration reiterated this week that audit rates won’t increase for people earning less than $400,000 a year. But if the IRS receives more funding, it would have a greater ability to target taxpayers in upper-income groups, even if tax officials don’t have expanded bank-transaction information on which to rely.