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IRS Tax Reporting Proposal
Information on the IRS Tax Reporting Proposal
in the American Families Act
What would the proposal do?
The proposal, if enacted, would require banks to report to the IRS information on customer account inflows and outflows for almost every account owner. These new reporting requirements raise serious concerns about consumers’ right to privacy. It would also increase the cost of tax preparation for individuals and small businesses and could discourage some consumers from joining the banking system.
As proposed by Treasury, with just a $600 threshold for gross inflows and outflows, nearly every bank account in the country would be captured by this newly proposed requirement. This approach does not target wealthy tax cheats, but instead captures information on almost every taxpayer.
Key Points:
The banking industry firmly believes 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.
This proposal would put customer privacy and data security at risk, would increase compliance costs to individuals and small businesses, will work against important efforts to bring more Americans into the banking system, and has the potential to damage customer relationships for banks of all sizes across America.
Banks already report a tremendous amount of data to the IRS, some of which the IRS has publicly stated it does not have the capacity to utilize. Under the new proposal, significant additional information, such as loan payments or transfers between a taxpayer’s various bank accounts, would be captured and reported. The amount of information submitted would be massive, unmanageable, and of questionable relevance to the calculation of taxable income. The IRS should demonstrate that it can process the information it already receives before collecting vast amounts of new data.
Much of the opposition to this proposal is really coming from taxpayers, not banks. Consumers are voicing real concerns about having their bank share this information with the IRS when the agency has a troubling track record of protecting taxpayer data. The IRS is a constant target of cyber criminals and has recently suffered significant data breaches. The recent ProPublica series detailing the tax returns of individual Americans is just one example. It is impractical and ill-advised for the government to put this significant amount of additional sensitive financial data at risk, especially when the IRS doesn’t have the capability to effectively utilize that data.
It is questionable whether the new reporting requirements would improve the IRS’s ability to identify the high-income tax evaders the administration is apparently targeting. Instead, the proposal appears to capture the millions of small business owners that operate as sole proprietorships, needlessly increasing their tax preparation costs. We believe the IRS should instead focus on better utilizing the significant information it already receives and targeting those it believes are engaging in tax avoidance.
The banking industry is working hard to reduce the number of unbanked in the country. As some interpret this proposal to require banks to police and report on the accounts of customers, we are concerned that it will undermine trust in the banking system and erode progress the industry has made.
