Industry braces for another fight over IRS tax reporting plan

WASHINGTON — Financial services industry lobbyists are gearing up to fight another effort by lawmakers to make banks and credit unions report more account information to the Internal Revenue Service.

Senate Democrats are considering narrowing reporting requirements to business-related income to sidestep consumer privacy concerns that doomed an earlier version, according to sources following behind-the-scenes discussions on Capitol Hill. Industry officials say they would remain strongly opposed because they don't want customers to view them as government spies.

“Regardless of [the] latest tweaking,” the proposal is “fundamentally flawed,” Paul Merski, the executive vice president of congressional relations and strategy for the Independent Community Bankers of America, said in an email.

Andrew Harrer/Bloomberg

The financial sector has flexed substantial political muscle since the spring, mobilizing thousands of customers against a Treasury Department proposal that would have institutions send account inflow and outflow data to the IRS. The Biden administration has said such reforms would lead to stronger tax compliance and help fund the so-called Build Back Better spending legislation spearheaded by the president.

The IRS plan wasn't included in the social spending package passed by House Democrats on Nov. 19, but the legislation must still clear the Senate. Key lawmakers there are working with the White House to salvage the IRS reporting regime.

White House officials and some Democrats on the Senate Finance Committee are exploring "ways to change their proposal to make it more palatable for those opposed," said one industry source tracking the talks who asked not to be identified.

"We have not seen any language or been told specifics,” the source added, “but [the financial services industry] will oppose any burdensome and intrusive requirement placed on our members and their customers."

The industry had complained that the earlier plan was a privacy “dragnet.” Now, the administration appears to be mulling a narrower focus on business income — an effort apparently led in the Senate by Sen. Mark Warner, D-Va., who sits on both the Finance and Banking committees.

Bloomberg Tax first reported that Senate Democrats were still weighing a revived IRS plan amid Build Back Better negotiations.

"Providing visibility into opaque streams of income is imperative in order to crack down on evasion by the wealthy," a Treasury spokesperson told American Banker on Monday. "We look forward to working with Congress on this important proposal."

A spokesperson for Sen. Warner said in a statement Monday that the Virginia Democrat "supports making our tax system fairer and ensuring that all taxpayers pay what they owe."

"Longstanding requirements for information reporting by financial institutions have proven their value in improving compliance, and the concept had bipartisan support" during debate on other legislation, the spokesperson said. "Sen. Warner will continue to work toward a targeted expansion of reporting that keeps burdens low while providing the information needed to ensure that all taxpayers pay their fair share.”

Analysts say that the more the government can do to distance itself from the sweeping breadth of the original IRS reporting proposal — which, as published by the Treasury Department in May, would have applied to any account that had more than $600 come in or out of it — the better chance it would have.

“The more this can be viewed as business activity that is not getting tax-versus-privacy concerns and access to individual bank accounts — that's a stronger political footing,” said Ed Mills, an analyst at Raymond James.

Sources familiar with the deliberations, who stress that talks are fluid, say that the White House and its political allies are also exploring ways that the program’s costs could be somehow subsidized for smaller banks. The financial sector is unlikely to be swayed, even if that sweetener is included.

“Every iteration of this ill-advised reporting regime has been met with fierce bipartisan opposition from across the country and for good reason,” said Richard Hunt, president and CEO of the Consumer Bankers Association. “Americans do not want their personal financial information turned over to the IRS.”

Less clear, however, is whether the adjustments will move congressional Democrats who came out against the IRS proposal in late October. Sen. Joe Manchin, D-W.Va., blasted the plan and was quickly followed by more than 20 centrist Democrats in the House, all of whom opposed the measure on consumer privacy grounds.

“The truth of the matter here is that there is still a search for pay-fors” to finance the spending legislation, Mills said. “But the industry has done a good job laying the groundwork for some of these IRS provisions to remain politically toxic.”

A narrower reporting regime might not necessarily be easier for banks to comply with. As the government tries to narrow the particulars, there will be a greater potential for technicalities to trip up financial institutions, compliance experts say.

“Reporting requirements with carve-outs and exemptions tend to be more complex to comply with, not less,” said Brian Lynch, president of the regulatory compliance and data analytics firm SteelEye. “Where rules aren’t black and white but need to be interpreted, firms often end up either doing too much or too little — resulting in increased risk.”

The administration’s focus seems to be shifting towards a reporting regime that monitors “harder-to-track transactions related to business partnerships, rental income proprietorships and royalties,” according to the Bloomberg report.

“Changing the reporting criteria to focus on the types of payments, instead of a dollar threshold, only makes the compliance burdens greater for credit unions and does nothing to alleviate the privacy concerns for the members of credit unions,” said Greg Mesack, senior vice president of government affairs for the National Association of Federally-Insured Credit Unions.

The ICBA's Merski said a subsidy wouldn't stop his organization's opposition to any new reporting requirements for banks. “It is an insult that policymakers would try to ‘pay’ bankers to snoop for the IRS and turn over customers’ private financial data,” he said.

In the meantime, other bank advocates remain frustrated that neither the White House nor Senate Democrats have shared any detailed plans.

“Release the legislative text, have a hearing, allow lawmakers to raise the concerns of their constituents,” Hunt said. “Don’t airdrop a proposal of this magnitude in at the eleventh hour.”