Under the proposal, banks, credit unions and other financial institutions would be required to annually report customers' account deposits and withdrawals of $600 or more to the IRS. Individual transactions would not be listed. The White House has estimated the policy, which would apply to bank, loan and investment accounts, could generate about $463 billion in additional revenue over the next decade.
Treasury Department officials have said that fears of increased audits on middle-class Americans are unfounded, after the Biden administration promised to not increase audits on anyone earning less than $400,000 annually.
"The proposal involves no reporting of individual transactions of any individual," Treasury Secretary Janet Yellen said this week during an interview on CBS News. "If somebody reports an income of $10,000 and they had $3 million go out of their checking account, that tells the IRS that's an individual you might audit."
But it has elicited a fierce backlash from banks who say the plan would increase compliance costs and add to the already existing burden the industry faces in turning over information to the government.
In a letter addressed to House Speaker Nancy Pelosi and Minority Leader Kevin McCarthy, more than 40 banks urged lawmakers to vote against such a proposal, warning it could create a "tremendous liability" for all involved by requiring the collection of financial information for the majority of Americans "without proper explanation of how the IRS will store, protect, and use this enormous trove of personal financial information."
"This proposal would create significant operational and reputational challenges for financial institutions, increase tax preparation costs for individuals and small businesses, and create serious financial privacy concerns," they wrote. "We urge members to oppose any efforts to advance this ill-advised new reporting regime."
In response, Democrats reached a deal to narrow the scope of the plan, with a reporting threshold higher than the $600 proposed by the Biden team.
"We’ve reached an agreement to not have the $600," House Ways and Means Chairman Richard Neal told reporters recently.
A Democratic aide told Bloomberg News the minimum could be raised to $10,000, but cautioned that discussions are still fluid and subject to change. Banks already report millions of transactions a day to the Financial Crimes Enforcement Network for any transaction that exceeds $10,000 – part of banks' anti-money laundering requirements.
House Democrats initially excluded the policy from its draft version of the tax bill because lawmakers were unable to reach a deal on it.
"You want to make sure it doesn’t hit the unintended. You don’t want to hit people at the lower end," Neal, D-Mass., said.
The White House has defended the plan, writing in a memo to congressional Democrats that requiring banks and financial institutions to provide a "little bit of high-level information" to the IRS on account flows gives the agency more information about wealthy Americans' earnings from investments and business activity.
It has stressed that banks will not have to report individual transactions to the IRS, but rather "basic, high-level information on account inflows and outflows."
"Imagine a taxpayer who reports $10,000 of income; but has $1 million of flows in and out of their bank account," the administration said in a memo to congressional Democrats this week. "Having this summary information will help flag for the IRS when high-income people under-report their income (and under-pay their tax obligations)."