Banks would have to give IRS data on accounts with more than $600 under proposal to catch tax cheats
As Congress negotiates the details of the reconciliation bill, a big question is how to pay for all the new spending.
One proposal would give the IRS a better chance to track down tax cheats.
It would require banks to report to the IRS all accounts with a balance of $600 or more or that have $600 or more in transactions. The IRS would then be able to compare the bank account information to the information on tax returns to see if there may be unreported income. The banks would not report the details on individual transactions — like whether you went to Wawa or the liquor store, booked a massage or a vacation to Aruba — but instead report the total amounts going into and out of the accounts.
The Biden Administration said the information would help the IRS find unreported income from rich individuals and businesses and help it close a tax gap of more than $160 billion — taxes owed on earnings that have never been paid.
Indeed, over the past decade, the IRS has been auditing fewer and fewer tax returns.
In 2010, the agency audited 1.11 percent of returns. In 2019, that number was down to 0.45 percent.
Treasury Secretary Janet Yellen told a Senate committee that the proposal would add two additional pieces of information onto the 1099-INT, a form that banks already file with the IRS.
“I think it’s important to recognize that we have a tax gap that’s estimated at $7 trillion over the next decade,” she said. “That is taxes that are due and are not being paid to the government that deprive us of the resources we need to do critical investments to make America more productive and competitive.”
But critics say the move would be an invasion of privacy and overly burdensome.
The American Bankers Association, in a letter to Congressional leaders, said the move would require financial institutions “to develop the necessary technology and processes to identify the accounts, report to the IRS and customers, and educate customers and bank staff on what the information does (and does not) mean.”
It also said that while the proposal is meant to go after high-dollar tax cheats, it would also have an impact on the little guy.
For example, it cited self-employed contractors who typically buy materials for construction jobs, saying they will commonly have gross inflows and outflows that exceed their actual income. The additional reporting could make innocent people come under scrutiny, it said.
“In the end, whether it is average workers or self-employed citizens, virtually all Americans will be subject to this new reporting,” ABA said. “The taxable portions of this activity are already generally captured by existing reporting, and it is unclear how these additional details will help the IRS target tax cheats in the top 1 percent of reporters.”
Rep. Jeff Van Drew, R-N.J., last week introduced a bill that would block the proposal if it became law, calling it “government overreach.”
“This useless proposal by the Administration is an invasion of Americans’ privacy rights and allows the government to have expanded access to individuals sensitive bank information,” Van Drew said in a statement. ”The vast majority of Americans are law-abiding taxpayers and we, as members of Congress, should be treating them as such.”
Yellen disputed the privacy concerns, noting that the proposal would not report individual transactions, and she said it would not be burdensome on banks.
“Banks already report directly to the IRS the interest that they pay on accounts when it exceeds $10, and this is not a proposal to provide detailed transaction-level data by banks to the IRS,” she told CNBC.