Democrats face growing storm over IRS reporting provision

Democrats are facing a firestorm of criticism over a proposal to increase the amount of bank account information reported to the IRS, posing a challenge as they craft their wide-ranging social spending bill.

The proposal is a top priority of the Biden administration, which argues it will help the IRS go after wealthy tax cheats. 

But it has come under a barrage of attacks from banks and Republicans, who say it raises significant privacy concerns. Financial institutions have been mobilizing their customers to speak out against the proposal to lawmakers.

Congressional Democrats are expected to make changes to the administration’s initial proposal, but are generally supportive of the idea. The increasing attacks on the proposal has prompted lawmakers and administration officials to go on the defensive.

“Ultimately, the President’s proposal seeks to pare back tax evasion by shedding some light on opaque sources of income that accrue disproportionately to the top 1 percent of earners,” Natasha Sarin, deputy assistant secretary for economic policy at the Treasury Department, wrote Thursday in a post on the department’s website.  

“As such, it is unsurprising that substantial resources are being deployed to defeat these efforts, because many tax cheats stand to lose from a fairer tax system,” Sarin added. 

The Biden administration earlier this year released a proposal that would require banks and other financial institutions to report on existing annual IRS forms the total amount of money that came into an account during a year and the total amount of money that came out of it. 

The president’s budget request proposed imposing the reporting requirement for accounts with flows of at least $600. Congressional Democrats have discussed raising that threshold to $10,000 and exempting payments from payroll processors.

The proposal could be a way to raise revenue that could be used to offset the cost of spending in Democrats’ social safety net package in areas such as child care, education and climate. Treasury estimated that the administration’s proposal would raise about $460 billion over 10 years, and has said that a narrower proposal could raise $200 billion to $250 billion over a decade.

The administration said the proposed reporting requirement would help the IRS better target audits and close the “tax gap” between the amount of taxes paid and amount owed, which Treasury has estimated to be about $7 trillion over the next decade.

“If somebody reports an income of $10,000 and they had $3 million go out of their checking account, that tells the IRS that’s an individual you might audit,” Treasury Secretary Janet Yellen said in an interview with CBS News this week.

The administration said that it plans to focus enforcement efforts on high-income taxpayers, and that audit rates wouldn’t increase for taxpayers with actual income of under $400,000.

But banking groups and Republicans argue that the proposal would lead to the IRS receiving additional financial information about a large swath of taxpayers. They’ve expressed concerns about the IRS’s ability to keep the information secure, pointing to past instances where the agency was hacked and where there were unauthorized disclosures of tax information.

“The implications of this reporting and data collection scheme are serious and far-reaching,” said Sam Whitfield, senior vice president of congressional affairs at the Consumer Bankers Association.

Financial groups said that many non-wealthy Americans would still have their accounts subject to the proposed reporting requirement if the threshold was raised from $600 to $10,000. And they said it would be complicated for them to implement exemptions for wage payments.

“We think this is a flawed proposal at any threshold,” said Ryan Donovan, chief advocacy officer and executive vice president at the Credit Union National Association (CUNA).

Banks and credit unions have been alerting their customers to the IRS proposal and have been urging their members to contact their members of Congress. Donovan said his group is aware of more than 500,000 emails and other communications from credit union members to Capitol Hill.

“We’re going to keep it up,” he said. 

Republican lawmakers, who have a long history of disliking the IRS, have also frequently been criticizing the IRS bank-reporting proposal in congressional hearings, speeches and op-eds.

GOP lawmakers on the tax-writing House Ways and Means Committee this week introduced a bill to bar Treasury from implementing a proposal along the lines of the administration’s plan.

“We should not allow the IRS to invade the privacy of Americans by snooping into their bank accounts,” Rep. Drew Ferguson (R-Ga.), lead sponsor of the bill, said in a statement. “The Biden Administration and Congressional Democrats have clearly demonstrated their intent to instate a broad financial surveillance regime using Americans’ private financial information.”

Congressional Democrats are still working on the details of any IRS bank-reporting provision for their spending bill. A provision on the topic was not included in the bill the Ways and Means Committee approved in September, with panel Chairman Richard Neal (D-Mass.) saying at the time that he was still discussing the issue with the administration.

Still, Democrats have been pushing back against criticisms of the proposal. Provisions to get taxpayers to pay the taxes they already owe could be appealing to Democrats if they face pushback within their caucus on proposals to raise taxes.

Speaker Nancy Pelosi (D-Calif.) said during a press conference Tuesday that a version of the IRS proposal would be included in the spending package.

“Yes, there are concerns that some people have, but if people are breaking the law and not paying their taxes, one way to track them is through the banking measure,” she said.

Democratic lawmakers and administration officials have been emphasizing that the proposal would not direct banks to give the IRS details about specific transactions, after some Republicans have inaccurately suggested that the IRS would receive this type of information.

“I think this proposal has been seriously mischaracterized,” Yellen told CBS News.

Senate Finance Committee Chairman Ron Wyden (D-Ore.) said in a statement that “the reason Republicans have latched on to this issue as the one to lie about every day is because they know their tax agenda is a political loser.” 

Supporters of the proposal are optimistic that a version of it is included in a final social spending package that gets enacted into law.

Seth Hanlon, senior fellow at the left-leaning Center for American Progress, said “there is strong support and a strong understanding of how important it is” among key congressional Democrats.

Hanlon added that lawmakers and the administration “have more work to do countering the false claims” about the proposal.

But those who have been critical of the proposed bank-reporting requirement are predicting that a proposal resembling the administration’s plan will not be included in the spending bill.

Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, whose former director now works in the Biden administration, said the proposal is too expansive and thinks bank lobbyists “have touched a raw nerve” with their customers who are concerned about privacy.

“I think at the end of the day, this bank proposal will fail,” he said.