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Does the IRS really want to spy on your bank account? The latest tax fight, explained

By: Scott Horsley | NPR
Posted on: Monday, October 25, 2021

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WASHINGTON, D.C. (NPR) — A new fight is brewing over taxes.

The Biden administration wants to require banks to provide the Internal Revenue Service with information about how much money flows in and out of individual accounts each year.

It’s part of a plan to catch people who might be cheating on their taxes and to raise badly needed revenue to help finance the Biden agenda. But Republicans are fighting back hard, calling the move an invasion of privacy, while banks object to the increased monitoring.

As with many battles involving taxes, a lot of claims — some of them false — are being hurled around.

Here is what’s going on.

What is the Biden administration proposing?

The administration wants to give the IRS more tools to spot people who might be cheating on their taxes. That could also deter tax evasion — just as drivers are less likely to speed when they know there’s a police officer around the corner with a radar gun.

The Biden administration wants to improve the tax collector’s financial radar, by requiring banks and other institutions to tell the IRS how much money flows in and out of individual accounts each year.

Despite Republican accusations that the IRS wants to spy on taxpayers, it’s important to note that banks would not report individual transactions — just an annual total of deposits and withdrawals.

Initially, the proposal would have applied to any account with at least $600 in total annual cash flows, but that’s now been narrowed in response to opposition from Republicans and banks.

Under the revised proposal, banks would have to report only on accounts with at least $10,000 in annual deposits or withdrawals, not counting deposits from paychecks or government benefits.

Why does the administration want this information?

The information would be used to narrow the “tax gap.” The Treasury Department estimates that some $600 billion in income taxes that are owed goes uncollected each year, often because taxpayers fail to report their income accurately.

Narrowing that gap and collecting more of the taxes that are owed would help Democrats pay for their ambitious agenda.

It would also make the tax system more fair. Wage earners have little opportunity to cheat on their taxes because the IRS already knows how much they make. Their income is reported by employers each year on their W-2.

The IRS has less information about other kinds of income, though, such as rent paid to landlords or profits earned by business owners. Because that income is less visible to the government, underreporting by those taxpayers is more common.

How would the IRS use the bank information?

The IRS could look for discrepancies between a taxpayer’s total bank deposits and withdrawals and their reported income. If someone’s bank account grows by a million dollars in a year when their reported income is just $50,000, the IRS might have a few questions.

Deputy Assistant Treasury Secretary Natasha Sarin says bank information would help the IRS target its auditing resources more effectively. But she stresses there’s no extra paperwork involved for taxpayers.

“From the taxpayer’s perspective, literally nothing is required,” Sarin says. “All that happens from the [honest] taxpayer’s perspective is the lower likelihood of a costly audit, when the IRS is better at figuring out who might not be compliant and figuring out who is.”

Why are banks opposed to the idea?

Banks argue that providing summary information on millions of accounts would be a costly headache — especially for smaller banks. They also raise the threat that the information might be hacked.

Rob Nichols, president of the American Bankers Association, acknowledges that fighting tax evasion is an important goal for the government, but he insists the proposed reporting requirement is the wrong way to go about it.

“It’s too blunt an instrument,” Nichols says. “It’s very unclear if they can keep it safe and secure. And it’s going after hardworking, average everyday Americans who pay their taxes.”

The strong opposition from banks and congressional Republicans has put the administration and Democrats on the defensive. Just days ago, they scaled back part of their plans, but they still intend to push them through Congress. So far, the prospect of passage remains uncertain.