Debate rages over Biden's proposed $600 IRS reporting requirement for bank accounts

Congress is out of town but the debate over Democrats' massive reconciliation spending bill continues, including over one provision that would require banks to report the inflows and outflows of any account with more than $600 in activity per year to the IRS.

Biden highlighted the provision in a Sept. 16 speech, pushing the bill as a way to go after rich people and close the wealth gap. 

"It would ask just for two pieces of information from the banks of these folks – the amounts that come into their bank accounts and the amounts that go out of their bank accounts," Biden said. The president added that this is so they can "pay what they owe, what the existing tax code calls for."

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The case for the reporting requirement

William Gale, senior fellow at Brookings Institution, supports the proposal because he says it would help make the tax system fair for all Americans, most of whom make their money from wages and have their taxes withheld by their employers. 

"It's basically like there's two systems of tax enforcement in place – for rank and file workers, middle class families, you know almost all their income is wages, and there's virtually no evasion on that," Gale said. "For high income households a much bigger proportion of their income is capital income, and the reporting is much more lenient on that and so the evasion rate is much higher." 

Gale also said that besides super rich individuals with massive capital income, owners of sole proprietorships, partnerships and farms also account for a large amount of unreported income that the IRS could go after. 

"Suppose you're a house painter," Gale said, using a contractor as an example of a business that could be a sole proprietorship. "They paint your house and charge you a thousand bucks. There's not withholding of taxes on that. There's no reporting. The homeowner doesn't report that payment to the government."

"And so the house painter might report, ‘Well, I made $500,’ to the government and keep the other $500 as unreported income," Gale continued. 

"It helps them target, you know, rather than trying to guess where to look, it gives them a better sense where to look," Gale said of how the reporting requirement would help the IRS detect fraud and get more money without increasing taxes.

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Gale also said that the requirement would impose no burden on individual taxpayers and essentially no burden on banks, who do most of their business digitally and already alert customers of large transactions or even minor overdrafts. 

"It already sends the information to the individual via, ‘Here’s your checking account statement and here's your saving account statement,'" Gale said. "All it is, is adding another address to the address line."

Gale dismissed privacy concerns of those who point out that the reporting requirement would be handing over inflow and outflow information of nearly every bank account in the United States. Any account used to pay rent, receive paychecks, buy groceries over the course of a year, or anything similar, would be subject to the $600 reporting requirement.

"The amount of privacy that we all give up by using the internet anyway is enormous," Gale said. "If you're gonna have a wedding or you're gonna pay the rent – if you're living in a house paying rent is that some deep, dark, mysterious secret? … It's sort of like the privacy objection to cameras at traffic lights. It's vastly overstated." 

Gale also noted that the Democrats' reconciliation bill doesn't just include the reporting requirement as a way to fight tax evasion, but it would fund the IRS so that it can hire more employees and buy better equipment with which to do its job.

The case against the reporting requirement

R Street Institute policy director Jerry Theodorou said it's a laudable goal to hold all people accountable for paying their taxes. But he argued that this reporting requirement is poorly crafted, too broad and would do more harm than good. 

"If it's aggregate activity of over $600, that's every bank across the country," he said, noting that the policy would affect far more people than just the top 1% or 5%.

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Theodorou also said that despite what proponents of the requirement may say, smaller banks and credit unions do believe the new requirement would create "systems issues" and they've been "pretty loud" about that. 

"They serve 100 million Americans and what the credit unions would have to do is invest in software and consultants to change their systems, and they would pass their costs onto policyholders," Theodorou said. He noted that anyone subject to the requirement would be subject to the risk of a data breach, and that banks might increase fees to cover the cost of complying with the requirement.

Theodorou also eschewed the idea that sole proprietorships and farms could move the needle for the IRS' shortfall. He instead recommended that the IRS focus its efforts on making sure the uber-rich are paying their tax obligations, because that is the group that has the most money. 

"Having every bank account in the country reported the IRS, the aggregate activity, doesn't – it's not going to give you the answer. It's not going to tell you where to look," he said. "I would recommend putting the resources in the higher-end evaders. Because… you've got individuals that are evading tens of billions of dollars verses your contractor that is under-reporting by [$40,000 or $50,000]… that's where the action is."

"If you do the numbers it's staggering in terms of the misallocation of resources," Theodorou said, comparing trying to recoup tax money from small business to "putting your finger in the dike" when contrasted with the upside of going after major offenders. 

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If Democrats do manage to pass the reconciliation bill, then the reporting requirement may be changed slightly from its current $600 level. Bloomberg News reported that Democrats were considering raising the threshold to $10,000. 

Theodorou said how quick Democrats were to change the threshold reflects how unserious their proposal is. 

"It makes me laugh because it just… tells me that the number is meaningless if you're going to go from hundreds to 10,000," he said. "Just an ordinary teacher, or you know, Post Office worker is going to have [$50,000-$60,000] moving in and out of their account every year because of their rent or school payments or food or whatever." 

Fundamentally, Theodorou said, the reporting requirement simply "misses the mark" and based on his analysis of arguments from Treasury Secretary Janet Yellen, "seems to be political." 

"It's buried in a three-and-a-half trillion dollar package there. So if it's not standing on its own, then you've got to look at it and say, ‘Why is it in there?’" he said. "This one doesn't pass the sniff test to me."