Banks' fight against IRS reporting may hinge on centrist Democrats

WASHINGTON — As Democrats try to advance a proposal to enlist banks in a crackdown on tax evaders, the party’s centrists could play a pivotal role in determining the plan’s fate.

But where moderates will come down on the measure is still somewhat of a mystery.

The proposal requiring banks to report account inflow and outflow information on their customers to the Internal Revenue Service is meant to raise tax revenue to help pay for President Biden's $3.5 trillion social policy package.

Democratic centrists such as Sens. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona have made clear the Build Back Better legislation must be trimmed back to get their support. They have not commented publicly on the IRS reporting proposal despite the banking industry's opposition to it.

Bloomberg News

Yet House Democratic moderates appear to have played a role behind the scenes in narrowing the scope of the IRS reporting plan, and one centrist told an industry group on Monday that she still had not made up her mind about the proposal.

“I think we're going to have to really try to shape it in a way that's carefully balanced,” said Rep. Stephanie Murphy, D-Fla., a member of the so-called Blue Dog Coalition of business-friendly Democrats, in remarks to the annual convention of the American Bankers Association in Tampa.

The IRS proposal was previously included in a Senate draft list of revenue raisers. It specified that banks would have to report aggregate inflows and outflows for accounts in which such transaction volume exceeded $600 annually.

The measure was initially left out of a revenue source list compiled by the House Ways and Means Committee, and later added with a higher threshold of $10,000.

"It's clear that Ways and Means didn't include it because of the centrist pushback in the House," said a financial services lobbyist who spoke on the condition of anonymity.

Murphy indicated that the choice for some members of Congress is to raise the reporting threshold or recognize that asking banks to report customer account activity is not the ideal approach to cracking down on tax avoidance.

Lawmakers may have to consider “raising the required disclosure level or even evaluate whether or not that’s the best method for us to get there,” she said.

Signs point to lawmakers continuing to revise the proposal to gain support.

The Washington Post, citing anonymous sources, reported on Monday that Senate Democrats plan to unveil a new plan as early as Tuesday. It would require the additional bank reporting for accounts with over $10,000 in annual deposits or withdrawals and exempt wage income from being included in that total.

Under Biden, the Treasury Department has pushed hard for lawmakers to adopt the reporting requirements as part of the massive reconciliation bill. Officials, including Secretary Janet Yellen, have argued the data would make it far easier for the government to identify tax cheats.

But banks have waged all-out war against the proposal in recent weeks. At the ABA convention, the trade group's CEO, Rob Nichols, described the issue as “probably the most concerning part of the budget reconciliation process.”

Republicans have blasted the IRS plan. But Democratic centrists could be in position to determine its fate.

“Conceptually, we've seen that there is a willingness to reshape and refocus this proposal in order to build a consensus, but I think that we’re going to need to see more,” said Isaac Boltansky, a managing director at BTIG.

Boltansky said that some key details of the plan still require clarity, like whether flows from an individual's separate accounts would need to be aggregated. "Ultimately, we're going to need to see the scope of its application narrowed in order to win the support of centrist Democrats,” he said.

Pressed by Nichols on the IRS proposal, Murphy said that while she supported “provisions to improve taxpayer compliance and basically close the tax gap without raising rates,” she was also sympathetic to banks’ concerns around compliance burden.

Community banks and their advocates in Washington have been the loudest critics of the IRS proposal by far. That likely hasn’t been lost on lawmakers in Congress, analysts say.

“If you're looking at Congress, and you're looking specifically at the House of Representatives, community banks have been extremely effective at getting through to lawmakers in both parties,” said Ian Katz, managing director of Capital Alpha Partners. “I mean, you can't watch a House Financial Services Committee hearing for 20 minutes without hearing somebody defend community banks.”

Progressive Democrats can also be quick to praise community banks. But for them, the IRS proposal’s stated objective of cracking down on tax avoidance by the rich is the more immediate goal.

“The difference between the progressives and more conservative Democrats on this issue isn’t so much about the banks; it’s that progressives have a view that is suspicious of rich people who they think are getting away with stuff,” Katz said. “Progressives definitely have more of an anti-rich sentiment in their views and in their rhetoric than moderate Democrats, who tend to just stay away from that issue.”

The issue is likely to remain top of mind for policymakers in the coming days. Republicans Sens. Pat Toomey of Pennsylvania and Mike Crapo of Idaho will host a press conference Tuesday on Capitol Hill to blast the proposal described in their press release as a way to “expand the reporting of private, confidential taxpayer information.”

But Boltansky said that even if centrists try to block the proposal, banks should not expect the plan to die right away. Improving tax compliance and raising revenue to pay for Biden's “Build Back Better” agenda have broad support among the Democratic caucus.

“There's enough willingness to frame this as part of the tax avoidance conversation, and there's enough necessity regarding the budgetary offsets that can be provided by those provisions, where you can still envision something getting done in the final package,” Boltansky said. “It's just got to change materially before you can get every Democrat in the Senate and just about every Democrat in the House to line up behind it.”