Bank Account Report Plan Would Affect Almost Everyone

Biden administration says it’s necessary to close tax gap, but fight continues

Businessman working at a desk with a notebook and computer
•••

PeopleImages/Getty Images

If President Joe Biden gets his way, the IRS would get more information on the financial accounts of many, many more Americans.

Key Takeaways

  • The Biden administration wants to increase the amount of information banks and other financial institutions must send the IRS about customer accounts. The proposal would require banks to send the IRS year-end reports on the total amount of money that went into and out of financial accounts, such as checking and savings accounts.
  • The goal is to help close the gap between government spending and revenue by rooting out tax cheats. Biden’s original proposal called for reports on every account with more than $600 in assets or total transactions, but Democrats reportedly are planning to change that, perhaps to $10,000.
  • Critics are worried about the IRS’s poor data security record as well as privacy concerns and the costs to financial institutions.

His proposal, which may or may not make it into a spending bill being hashed out between Democrats and Republicans, would require banks and other financial institutions to report the total annual amount of money going in and going out of financial accounts, such as checking and savings accounts, held by most Americans. The banks would report the information at the end of the year, so the IRS would have it at tax time. 

The Biden administration says the new reporting is necessary to cut down on tax evasion and close the tax gap, which is estimated to be as high as $1 trillion per year.

Biden’s original plan was for the reporting requirements to apply to any account with a balance of more than $600 or with transactions totaling more than $600, but Bloomberg reported late Thursday that Democrats are tinkering with the actual threshold they will push for.

Many More Accounts Would Be Affected

The tax compliance procedures called for in Biden’s proposal, including the new reporting requirements, would bring in revenue of about $700 billion over the next 10 years, according to a Treasury Department estimate.

At $600, the threshold for the reporting requirements to kick in is so low that most people with financial accounts would be affected. Even at $10,000, it would mean that the IRS would be collecting information about the financial activities of many more people than it does now.

Banks already report some information about your financial activities to the IRS, but the reporting is done on a per-transaction basis, not on total inflows and outflows to your account, and it’s limited.

Currently, if you make deposits or certain other cash transactions of more than $10,000—purchases of cashier’s checks, bank checks, or money orders, for example—the bank or other financial institution where you made the deposit or purchase must report it, something most people aren’t even aware of. The purpose of these reports is to cut down on money laundering and tax evasion.

The individual or business receiving those cash transactions also must report them if they are made as payment to a “trade or business”—that includes everything from attorney services to sales of jewelry or any other item. So if you are a dealer in boats or collectibles, for example, you would have to report, on IRS Form 8300, these cash payments.

State of the Proposal

Whether the proposal for stricter reporting requirements will survive at all is unclear. It was supposed to be part of a tax plan from the Biden administration to fund the American Families Plan, a $3.5 trillion social spending package. But last week, the House Ways and Means Committee released a modified plan, and many people noticed that it did not include the much-discussed reporting requirements for financial institutions.

The proposal’s noticeable absence was seen as a sign the measure lacked support, but by late Thursday, Democrats had reached a deal to raise the threshold to require financial institutions to report account flows to the IRS, Bloomberg reported, citing a key House Democrat. The story, quoting a Democratic aide, said discussions are focused on possibly raising the threshold to $10,000. 

And last week, U.S. Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig each wrote a letter to the committee reiterating their view that the increase in bank reporting requirements was a crucial piece of the spending bill. They said it would enable the IRS to more easily uncover and target tax cheats for audits and enhance tax compliance, and that it would actually cut down on audits of ordinary, law-abiding citizens.

Meanwhile, a group of Republican senators led by ranking Senate Finance Committee member Mike Crapo and House Ways and Means Republican leader Kevin Brady introduced their own bill earlier this month. The Tax Gap Reform and Internal Revenue Service (IRS) Enforcement Act would, among other things, specifically prohibit establishing new bank reporting requirements.

Security, Privacy Concerns

Critics of the possible new reporting requirements pointed to the IRS’s poor data security record, as well as the expense of placing additional burdens on financial institutions and privacy issues.

In June, the American Bankers Association sent a letter to the committee warning that the costs and complexities associated with changing the reporting structure “would be very substantial.”

The low threshold “would create a dragnet, collecting the financial information of most Americans and requiring significant resources to build, police, and maintain,” something the IRS doesn’t have a good track record of doing, it said. 

“The IRS experiences 1.4 billion cyberattacks annually. Unfortunately, the IRS has a continued track record of data breaches and continues to deal with the fallout of identity theft and filing of false tax returns. Adding an entirely new set of data without first ensuring the security of existing IRS records will only compound the IRS's systemic problem and expose even more customer data,” the letter said.

Rooting Out Tax Cheats

Advocates of the stricter requirements argued that financial institutions already have the necessary information, and they already have to report interest income on a yearly basis, so simply adding two boxes to the current form—for the inflow and outflow numbers—wouldn’t be a leap. Besides, the legislation “can be designed so the reporting doesn’t start right away,” said Samantha Jacoby, senior tax legal analyst at the Center on Budget and Policy Priorities. “It could take a year to start it up.”

As for privacy issues, Jacoby said a low threshold protects privacy because the requirement applies broadly. If it were based on income, which financial institutions don’t necessarily know, banks would need information from the IRS about whether people met a certain threshold of income, and that would be an invasion of privacy, said Jacoby.

Jacoby noted that the Biden administration plans to increase funding for the IRS by $80 billion between 2022 and 2031, which will allow it to upgrade its technology and better safeguard taxpayers’ information.

Additionally, cheaters would not be able to fly under the radar by using multiple accounts, said Jacoby. “It’s well thought out.” 

Aside from rooting out more tax cheats, Rettig in his letter noted a side benefit of better reporting: “The more transparent a taxable event is to the IRS, the more likely the event is to be accurately reported and proper taxes are to be paid,” Rettig wrote. “This is in large part because whenever the IRS implements new information reporting requirements, voluntary compliance rises.”

Have a question, comment, or story to share? You can reach Medora at medoralee@thebalance.com