WASHINGTON — Opposition is mounting to a Biden administration plan to require financial institutions to report customers’ account flow data to the Internal Revenue Service, with banks, credit unions and some consumer advocates warning it would be a massive invasion of consumer privacy.
The Treasury Department outlined a proposal in its recent budget request for a regime requiring banks and other financial institutions to report inflows and outflows in consumer accounts with more than $600. The goal is to crack down on tax evasion by high earners and narrow the so-called tax gap between what Americans pay and what they owe.
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"It’s not a targeted program," said Ed Mierzwinski, senior director of the federal consumer program at the U.S. Public Interest Research Group, who warned lower-income Americans could be targeted by the reporting regime. "They are collecting information about everybody and I don’t know why it is necessary to collect information about everybody.”
The top 1% of taxpayers fail to report as much as 20% of their income, and the projected tax gap could reach roughly $7.5 trillion, according to estimates. The IRS cannot always identify more obscure income sources in parnerships, LLCs and S-corporations. The administration has also called for more resources at the IRS to conduct tax audits, which plummeted between 2010 and 2018.
The proposed financial reporting regime is seen as helping the government gain insight on wealthy earners. But financial trade associations and others warn that will be a costly undertaking for the industry to implement it, and it could expose private account data. Many say that would be a significant expansion of what banks report to the government about their customers, on top of the suspicious activity reports they submit to the Financial Crimes Enforcement Network.
“This threatens to become a huge data exercise for banks that will be enormously expensive due to what will be substantial pressure to perform it perfectly, and with the consequences of becoming deputized by the government — just as they have been with the Bank Secrecy Act,” said Jeff Naimon, a partner at Buckley. “This could also become a substantial intrusion on financial information most people consider to be private.”
Nearly a dozen banking trade associations said in a letter to the House Ways and Means Committee last week that the IRS’s history of data breaches suggests that the collection of new data would pose serious privacy risks for consumers. They included the American Bankers Association, Indepent Community Bankers of America, Credit Union National Association and the National Association of Federally-Insured Credit Unions.
“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,” the trade associations wrote. “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.”
Dan Stipano, a partner at Davis Polk & Wardwell, said that anti-money-laundering reporting rules only require institutions to report information deemed suspicious.
"At least with respect to the Bank Secrecy Act, banks are only required to report suspicious transactions, where there's potential criminal activity," Stipano said. "But in this case, they're going to be turning over financial records of millions of people who aren't suspected of doing anything wrong.”
Ryan Donovan, chief advocacy officer at CUNA, said Bank Secrecy Act requirements also have a minimum $5,000 transaction threshold for suspicious activity reports.
"In the case of BSA, there are clear thresholds that trigger those types of reporting requirements," Donovan said. "When you talk about the difference between this proposal and what credit unions and banks do on BSA/AML, I think it’s magnitudes greater, because you are talking about every consumer and small business."
The proposal comes as progressive advocates have complained that wealthier Americans aren't paying their fair share in taxes. ProPublica reported earlier this month that billionaires like Amazon CEO Jeff Bezos and Berkshire Hathaway CEO Warren Buffett paid a “true tax rate” less than 1% from 2014 to 2018.
But the report, based on leaked IRS tax documents, has also raised skepticism about the government’s ability to protect private information.
“Anybody you talk to who is at the IRS for any period of time is going to be remarkably troubled by the leak of data that ProPublica got,” said Steven Miller, a former acting IRS commissioner. "That's not the way the IRS should operate."
Doug O’Donnell, the IRS deputy commissioner for services and enforcement, defended the agency's privacy protocols to the House Ways and Means Committee last week.
"We take very seriously the protection of information, it's part of our core culture," O'Donnell said. "Every employee is instructed in the importance of protecting information. Annually, every employee from the top all the way down to the lowest-graded employee takes training regarding the prohibitions on unauthorized access to information as well as sanctions for disclosing taxpayer information."
The new financial reporting regime has also caused some consternation for consumer advocates.
“Obviously there is a definite need to hold the rich accountable,” said Mierzwinski. “On the other hand, I share some of the views that the IRS has not been a good steward of consumer information."
Isaac Boltansky, director of policy research at Compass Point Research & Trading, said that the IRS financial reporting proposal could be one of the rare occasions where consumer advocates and the financial industry are united in opposition.
“This could very easily become one of those odd instances where we have strange bedfellows of banks and consumer groups teaming up to push back, albeit for different reasons,” Boltansky said.
Bankers also fear that privacy implications of the new reporting rules could prevent consumers from opening accounts at safely regulated financial institutions.
“You're going to change the fundamental relationship between your customer and the bank … and you're going to push people out of the banking sector that are already leery of the government knowing too much information about their personal accounts,” said Paul Merski, executive vice president for congressional relations and strategy at the ICBA.
Stipano added that certain populations of consumers are already skeptical of the banking sector.
“There's already a fair amount of reluctance to do business with banks,” Stipano said. “We have communities in the United States with large unbanked and underbanked populations, which is due at least in part to a concern that their personal records are going to be turned over to the government. … This will probably be another factor that people will weigh in their willingness to open bank accounts.”
Miller disputed the idea that customer account-flow data would be a substantially broader collection of information than what the agency already receives and said that the information would likely be useful to the agency in cracking down on tax evasion.
“Frankly, there's enough data in the IRS coffers to create problems for folks already,” Miller said. “I'm not sure this increases that by so much. … The IRS should have this information. I think would be useful to them. They wouldn't have asked for it if they didn't think so.”
And five former Treasury secretaries wrote in a
“We are convinced that better information-reporting requirements can be designed that will permit significant increases in revenue collection without imposing any burden at all on taxpayers and imposing no significant increase in regulatory burdens across the economy,” the former Treasury secretaries, Timothy Geithner, Jack Lew, Hank Paulson, Robert Rubin and Larry Summers, wrote in the Times article. “Relying on financial institutions to relay some basic information about account holders is a sensible way forward.”
IRS data indicates that audits of individuals earning more than $1 million annually declined more than 60% from 2010 to 2018.
Yet Republican lawmakers are also beginning to raise their voices in opposition to the proposal. Sen. Mike Crapo of Idaho, the top Republican on the Senate Finance Committee, said at a hearing Wednesday that the government should not need to know all aspects of consumers’ income and assets.
“The proposal, which is sold under the guise of trying to close the tax gap, is very concerning and pulls almost all taxpayers into a surveillance dragnet,” Crapo said. “The era of big data should not be viewed as an opportunity for big brother. I do not agree with some high-tax advocates that private tax information should be a public good, with governments and the public knowing every private aspect of individual and business income and assets.”
