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Democratic plan to have banks report transaction data to IRS raises privacy fears

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Democratic plan to have banks report transaction data to IRS raises privacy fears

September 30, 07:00 AM September 30, 07:01 AM

Democrats’ plan to have banks report all transactions over a certain amount to the Internal Revenue Service is mired in practical and privacy concerns, Republicans and some tax groups contend.

President Joe Biden initially planned for banks to report all account inflows and outflows of over $600 to the IRS to help raise revenue for Democrats’ multitrillion-dollar infrastructure and social spending package. Since then, Democratic leadership has worked to narrow the scope of the provision and revise the threshold, perhaps up to $10,000.

The concept would be a new one for both banks and the IRS. Currently, banks are only required to file currency transaction reports on all deposits of over $10,000 to the Treasury Department’s Financial Crimes Enforcement Network. The FinCen works to curtail money laundering and crime but doesn’t monitor the reports for tax purposes.

Two major issues with the idea, which at the $600 threshold proposal was projected to raise nearly $500 billion in revenue, are privacy and logistics.

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Garrett Watson, senior policy analyst at the Tax Foundation, told the Washington Examiner that the collection of such an enormous amount of data about people and their finances raises legitimate privacy concerns.

Those trepidations are amplified by the fact that the prevalence of cyberattacks has been growing and the IRS is still facing enormous scrutiny over a massive leak of hundreds of pages of tax data from the wealthiest Americans.

More than 140 GOP lawmakers sent letters to Ways and Means Committee Chairman Richard Neal, House Speaker Nancy Pelosi, Treasury Secretary Janet Yellen, and IRS Commissioner Charles Rettig highlighting their concern that the compilation would put millions of people’s financial data at risk.

During a recent appearance on Capitol Hill, Sen. Cynthia Lummis grilled Yellen about the proposal’s impact on privacy and the “dramatic new regulatory burden” for banks.

“My question is: Are you aware of how unnecessary this regulatory burden is?” the Wyoming Republican wondered. “Do you distrust the American people so much that you need to know when they bought a couch? Or a cow?”

There are also logistical challenges at play in reporting all transactions over a certain amount.

The IRS would encounter an enormous volume of information that it would have to sort through to make the undertaking worthwhile, according to Watson. He said it would also be a time-consuming process to develop the software and technology needed to process the data — in addition to hiring personnel to work on it.

“Even if you assume that there is no privacy issue or concern with respect to taxpayer protection, it’s a lot of information for the IRS to sift through and it’s far from clear that the agency has the capacity, the software, and the knowledge needed to sift through this amount of information to actually efficiently pursue those who are evading their tax obligations,” Watson said.

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The IRS is already struggling with processing tax returns — more than 35 million were still unprocessed at the end of June, four times more than in 2019. Tax advocates contend that the IRS should focus on improving its existing framework rather than adding new challenges to its plate.

Rep. Kevin Brady, the ranking member of the Ways and Means Committee, was asked about the Democratic proposal during a Wednesday phone call with reporters. He knocked estimates about the actual size of the tax gap, the aggregate amount of taxes owed versus taxes collected, as shaky and hit at the idea of banks reporting more data.

“I think the bank surveillance proposal is a huge overreach,” the Texas Republican said. “The IRS wouldn’t know what to do with just the value of that data, and frankly, regrettably, they don’t do a very good job protecting taxpayer information.”

Banks themselves are also not supportive of the revenue-raising proposal. The American Bankers Association blasted the plan as “a dragnet of data collection” that targets almost anyone with a financial account and not just suspected tax cheats.

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“If enacted, banks of all sizes will have to spend significant resources to capture and report this information to the IRS and customers,” the ABA said in a statement. “Those resources would be much better spent investing in the new banking technologies bank customers want and need.”

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