Banks escalate fight over IRS reporting in Biden budget plan

WASHINGTON — The financial services sector is girding for an extended battle over a legislative proposal requiring banks and other institutions to report customer account data meant to bring in more federal tax dollars.

The measure is being considered by lawmakers as a source of revenue in the Biden administration’s proposed $3.5 trillion budget reconciliation plan. It could result in banks having to report transaction data for any account with at least $600 of inflows or outflows annually.

Bankers and even some consumer advocates have blasted the idea, which first garnered attention this past spring as part of the administration’s American Families Plan, as a compliance headache and a privacy nightmare for customers. Financial institutions say they already report reams of data to the Internal Revenue Service.

But the industry’s focus on the provision has intensified in recent days with Democratic lawmakers intent on passing one of President Biden’s key legislative priorities.

“From a bank perspective, the administrative challenges and complexities of having a $600 annual threshold may not achieve the policy goals of reducing tax avoidance,” said Scott Talbott, senior vice president of government relations at the Electronic Transactions Association.

“At $600, the squeeze may not be worth the juice,” Talbott added.

In search of revenue, the Biden administration has argued that a more robust reporting regime would narrow the so-called “tax gap” and help the IRS identify billions owed to the government by wealthy taxpayers that go unpaid.

Bloomberg News

The budget plan would enact a bevy of social policy objectives to accompany a separate looming infrastructure overhaul. In search of revenue, the Biden administration has argued that a more robust reporting regime would narrow the so-called tax gap and help the IRS identify billions owed to the government by wealthy taxpayers that go unpaid.

The proposed IRS reporting regime, which would expand the income tax data banks already report on their customers, was included among a list of potential revenue sources in a draft document circulating on Capitol Hill that was obtained by American Banker. The House Ways and Means Committee could consider the tax reporting proposal shortly, according to some sources.

Yet the document also suggested that lawmakers could be flexible about adjusting the $600 threshold for reporting.

Although budget reconciliation is one of the few legislative vehicles that can pass the Congress by a simple majority without the prospect of a Senate filibuster, industry representatives say they still have a chance to stop the IRS reporting measure.

We certainly don’t consider anything a done deal in reconciliation,” said James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association. “There’s a long way to go in this process.”

On Tuesday morning, the Independent Community Bankers of America released the results of a survey conducted with Morning Consult that found that 67% of respondents were opposed to “a proposal that would allow the IRS to collect bank account deposit and withdrawal information from American consumers,” according to a press release from the trade group.

“A bipartisan supermajority of Americans clearly opposes Washington’s plan for the IRS to monitor their bank account information, which Congress is now quickly advancing through a budget reconciliation package that requires only a simple majority to pass,” ICBA President and CEO Rebeca Romero Rainey said in a statement accompanying the survey results.

Later that same day, ABA President and CEO Rob Nichols sent a letter addressed to leadership on the House Ways and Means Committee and Senate Finance Committee “to reiterate our strong opposition to a proposal requiring banks to report to the IRS new information on their customers’ accounts.”

“ABA and its members firmly believe that Americans should honor their tax obligations, but it is far from clear that requiring banks to report on every single customer financial account with gross inflows and outflows above $600 — creating a mountain of new data — will lead to better tax compliance,” Nichols wrote in the letter, dated Sept. 7.

Nichols even suggested that the requirement could undercut banks’ recent efforts to expand financial access for underserved populations across the U.S.

“Our member banks and policymakers share the common goal of reducing the number of unbanked Americans,” Nichols said. “As some interpret this information reporting proposal effectively to require banks to police and report on the accounts of customers, we are very concerned that it will undermine trust in the banking system and erode the progress we have made reducing the number of unbanked and underbanked in the country.”

On the ICBA’s website, the trade group posted a “consumer alert” raising concerns about privacy issues for customers arising from the proposal. The alert urged consumers to contact members of Congress and featured a video clip of Rainey.

“Mandating broad new bank reporting to the IRS on all business and personal bank accounts would infringe on the privacy of bank customers,” Rainey said on video. “It would also push more people away from a banking relationship and overload the IRS with more data than it can possible process or keep safe.

Cracking down on tax avoidance remains a high priority for the Treasury Department. A report published by Treasury on Tuesday estimated that the top 1% of income earners accounted for 28% of the nation’s unpaid tax bill annually, for a total of roughly $160 billion.

The report emphasized the need for the IRS to be properly funded and staffed in order to improve tax collection. But it also pointed to a broader lack of reporting data that further hampers the agency’s efforts.

“To further ensure that everyone pays their fair share, the Administration also calls for using information that financial institutions already possess — without imposing any burden on taxpayers whatsoever — so the IRS can deploy these additional resources to audit more sophisticated tax evaders,” according to the report, which was written by Deputy Assistant Secretary for Economic Policy Natasha Sarin. “These changes to the third-party information reports are estimated to generate $460 billion over a decade.”

In Congress, the prospective IRS reporting requirements last appeared during negotiations for the $1 trillion bipartisan infrastructure package that passed the Senate in August and currently awaits a vote in the House.

Senate Republicans shot down the IRS reporting measure for banks along with other provisions that would have bolstered the IRS’s enforcement authority.

One hopeful sign for banks is it remains unclear how large the budget reconciliation bill will be, particularly if more moderate Democratic senators push for a lower figure. A smaller package would require fewer sources of revenue. Earlier in August, conservative Democrat Senator Joe Manchin argued in The Wall Street Journal that $3.5 trillion was simply too large.

But Talbott says expanded reporting to cut down on tax evasion by the wealthy could have political appeal.

“There is clearly an ongoing policy move towards reporting,” Talbott said. “We’ve seen a number of instances where reporting information to the IRS has been politically popular, so the odds of this passing as a ‘pay for’ — it’s high.”

If the IRS reporting measure does advance in the later stages of negotiations, the industry is expected push for lawmakers to significantly raise the reporting threshold beyond the current $600 level.

“When you’re talking about accounts of $600 or more, you’re talking millions and millions of accounts of everyday American taxpayers and small businesses,” Ballentine said. “It’s almost as if they’re trying to create a haystack in order to find the needle.”

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