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Congress Shouldn’t Let the IRS Snoop on America’s Bank Accounts

 

By Thomas Aiello, National Taxpayers Union

In order to cover the cost of their behemoth $3.5 trillion spending package, House Democrats have had to employ some pretty creative ideas. Of course, it’s entirely appropriate to substitute the word “creative” with “downright dangerous.” From price controls on life-saving pharmaceuticals, new nicotine taxes that will disproportionately impact lower-income Americans, and much more, there is no shortage of bad tax policy. While the overall package continues to evolve, taxpayers should be immediately concerned about a particularly harmful provision that is on the cusp of being added. 

According to reports, Congressional Democrats are considering requiring financial institutions to report private taxpayer information to the IRS, a move that would further weaponize one of the most powerful agencies in Washington. This idea has gained traction among progressive groups in town as a way to crack down on tax evasion and close the tax gap, which is the difference between federal taxes owed and paid by individuals, families, and businesses. Some have estimated this gap to be as high as $1 trillion, but analyses from the National Taxpayers Union Foundation and others have poured cold water on that staggering figure. Addressing the tax gap is justified – no one should knowingly evade taxes that they owe – but the solution offered by the majority may be overly prescriptive.

Expanding third-party reporting requirements would mandate financial institutions, such as community banks and credit unions, to report the transactions of their customers to the federal government. It’s true that financial institutions already provide the IRS with a significant amount of tax information, but the proposed provision would require them to report even more private data on all business and personal accounts with a balance of $600. This means any American who has their paychecks deposited into their accounts or spends more than $600 annually would have their private account information sent to the IRS for potential review. In this scenario it’s not unreasonable to make the claim that an individuals’ bank would essentially become another tentacle of the IRS.

The Department of the Treasury estimates this provision could raise $460 billion over the ten year budget window. In fact, in a recent September 14th letter to Congress, Treasury Secretary Yellen “enthusiastically” supports such a provision due to its “substantial” revenue potential. Secretary Yellen’s endorsement to observing private bank accounts is deeply troubling and should be met with bipartisan skepticism.

Many Americans would (and rightfully should) be uncomfortable with the fact that the IRS would be in possession of their private account information and transaction data. The federal government has no business surveilling the private account information of innocent Americans. This unprecedented expansion could also put scores of honest taxpayers in the crosshairs of the IRS’ audit team, even if they did nothing wrong. If passed, it will increase the likelihood of regular, honest Americans being subject to invasive audits – and no American has ever been “enthusiastic” about being investigated by the IRS.

It is not an understatement to say that this development would be one of the biggest invasions of privacy by the federal government in recent years. Expanding the powers of the IRS justifies many taxpayers’ fears about the growing size and influence of the federal government in their daily lives.

In addition to infringing upon Americans’ personal privacy, these changes could lead to higher burdens and costs for American financial institutions. As a result credit unions and community banks would have to hire additional personnel and devote significant additional resources to handing more cash-flow information over to the agency. Indeed, a coalition of organizations representing the financial services sector wrote to Congress to warn them that the third-party reporting proposal “would impose cost and complexity that are not justified by the potential, and highly uncertain, benefits.” While some of these initiatives may help narrow the tax gap, the agency should be required to furnish Congress with a good-faith estimate of how much these new proposals could cost the private sector.

Given these facts, NTU strongly opposes the inclusion of this provision in the reconciliation bill, as it could be utilized by the IRS to weaponize an individual’s checking account against themselves. By closely monitoring deposits or withdrawals with any account with $600 that individuals make from their bank account, IRS agents would be able to see when a paycheck or Venmo transaction gets deposited, or when rent, child care, or car payments get withdrawn. IRS agents would have to comb through this information, exposing the private information of law abiding citizens, all in the hopes of trying to catch tax cheats.

Congress can and should address the tax gap, and NTU was pleased to offer our recommendations in June. But every policymaker should pledge that new requirements shouldn’t jeopardize taxpayer privacy, come on the backs of lower-income Americans, or create added costs for the private sector as they recover from the pandemic. 

 


Thomas Aiello is the Director of Federal Affairs for National Taxpayers Union.