The Biden administration is pressuring lawmakers to enact a controverisal plan requiring banks to turn over to the Internal Revenue Service detailed information about inflows and outflows of almost all American bank accounts.
Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig sent letters to lawmakers this week asking Congress to include in tax hike legislation a requirement that banks report annual transaction data on accounts with $600 or more or that have $600 worth of transaction over the year, the Wall Street Journal reported.
The result would be the collection of detailed data about the bank transactions of tens of millions of everyday Americans.
The aim is to help the I.R.S. collect taxes from individuals and businesses on unreported income and to create more leads for audits.
The Biden administration claims the additional information would result in the IRS collecing an additional $460 billion over a decade. The administration wants to use this additional revenue to offset some of the new spending for expanded government social policies and green new deal schemes Congress is currently considering.
The proposal did not make it into the list of tax change proposals put together by House Democrats. The Wall Street Journal reported that absence is a sign that the proposal lacked support among Democratic lawmakers.
Financial institutions say it would impose a costly compliance burden that would be especially difficult to manage for smaller banks and credit unions. Critics have also said that the IRS lacks the ability to rationally analyze the enormous amount of data it would receive.
Critics of the proposal also warn that the proposal would create a centralized database of nearly all Americans’ bank accounts, loans, and investment accounts—a likely target for hackers and spies. The risks of such a database were highlighted last year when the leftwing investigative journalism website Pro Publica said it had “obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years.” If this proposal had been in place at the time, Pro Public might also have data on bank credits and debits.
In her letter, Yellen argues that tax compliance is much higher when people know that the IRS has data on their income. In other words, even if the IRS cannot effectively analyze the data, just the fact that it has it might persuade Americans to report income that might have gone unreported.
“Wage and salary income is reported to the IRS on W-2 reports, and tax obligations are automatically withheld, so compliance rates stand at 99 percent,” Yellen wrote. “It is clear that when taxpayers know that this information exchange exists, their voluntary compliance rises.”
Banks and other financial firms already report interest, dividend, and investment income to the IRS. Wages get reported to the IRS and the Social Security Administration.
The IRS can summon bank account information during audits but taxpayers can fight these requests by showing they are for an illegitimate purpose or irrelevant to the inquiry.
Yellen claims in her letter that although the IRS would receive bank information on Americans of all incomes, the proposal is aimed at collecting more taxes from the wealthy. Lower income Americans would benefit, according to Yellen, because they would allegedly be at lower risk of an audit.