The Biden administration backtracked on a contentious proposal to direct the IRS to collect additional data on every bank account with more than $600 in annual transactions on Tuesday, following widespread criticism from Republican lawmakers and banking industry representatives who said the tax enforcement strategy constituted a breach of privacy by the federal government.
Instead, the administration and Senate Democrats propose raising the threshold to accounts with more than $10,000 in annual transactions, and any income received through a paycheck from which federal taxes are automatically deducted will be exempt from reporting. Recipients of federal benefits such as unemployment and Social Security would be exempt as well.
The IRS would take the total of deposits and withdrawals from bank accounts containing more than $10,000 in non-payroll income. Individual transaction data would not be collected.
The Treasury Department announced the changes on Tuesday.
“In response to scope concerns, it [Congress] has devised a new approach that includes an exemption for wage and salary earners and federal program beneficiaries.” Such earners can be completely removed from the reporting structure under this revised approach. This is a well-reasoned change: the IRS already has information on wage and salary income and federal benefits received by American workers and retirees,” according to a Treasury Department fact sheet on the changes.
The changes would exempt millions of Americans from the reporting requirement, and help the IRS target wealthier Americans, especially those who earn money from investments, real estate, and other transactions that are more difficult for the IRS to track. \s”
Under the current system, American workers pay almost all of their tax bills, while many high-income earners avoid paying billions in taxes by exploiting the system. The root of the problem is a disparity in how different types of income are reported to the IRS: opaque income sources frequently escape scrutiny, whereas wages and federal benefits are typically subject to nearly full compliance. This two-tiered tax system is unfair and deprives the country of resources that could be used to fund core priorities “Treasury Secretary Janet Yellen made the announcement in a statement.
According to the fact sheet, “Consider a taxpayer who declares $10,000 in income but has $10 million in and out of their bank account. Having this summary information will assist the IRS in identifying when high-income individuals under-report their income (and under-pay their tax obligations). This will allow the IRS to focus its enforcement efforts on those who are evading their tax obligations, reducing the cost and burden of audits for the vast majority of taxpayers who pay what they owe.”
The proposal is still a long way from becoming law. It is currently included in a multi-trillion dollar social spending package negotiated by lawmakers and the White House for months. If that bill is passed and signed into law, the requirement will not go into effect until December 2022.
Republican claims that the proposal’s goal is to snoop on Americans’ financial transactions are refuted by Senate Finance Committee Chairman Ron Wyden, D-Ore. Wyden made it clear that the additional reporting would not apply to Americans who make a large purchase of more than $10,000.
The administration did not say whether the changes will have an impact on the additional tax revenue they may be able to collect through enforcement. According to the administration, improved tax enforcement could generate up to $600 billion in additional tax revenue over the next decade.
The initial proposal, which would have affected nearly every non-dormant bank account in the United States, sparked outrage among Republican lawmakers, who called it a violation of privacy and an example of government overreach.
Even after the proposal was revised, Republicans in the Senate remained skeptical. Sen. Mike Crapo, R-Idaho, cited President Biden’s pledge not to raise taxes on anyone earning less than $400,000, implying that the $400,000 threshold should be applied to IRS reporting.
Crapo was unable to provide an example of an alternative method of closing the tax gap other than to mention “closing loopholes.”
Banking industry representatives continue to be skeptical of any additional reporting requirement, claiming that it will impose a burden, particularly on smaller community banks.