The Biden administration is looking for ways to close an estimated $160 billion tax gap — the amount of money that is owed by various taxpayers but that has not been collected. It is an admirable goal and highlights a definite problem that needs to be addressed in a responsible way.
Unfortunately, one of the administration’s main proposals is not that.
Treasury Secretary Janet Yellen has proposed to Congress that banks be required to report the total annual inflow and outflow of any account with at least $600 in it or an aggregate of $600 in transactions over the course the year. Virtually every bank account in America would fall under such a low threshold.
Mitch Waycaster, president and CEO of Renasant Bank, best summed up the obvious problems with such a proposal: "The administration's proposal to require financial institutions to track and submit the vast majority of their banking customer information to the IRS risks major data breaches, infringes on financial privacy and overburdens the banking system with massive data collection responsibilities …”
Proponents defend against charges of privacy invasion by pointing out such reporting would simply add two lines to existing 1099 tax forms. The two lines would show the total deposits and total deductions from each account for the year but would not provide any transaction details.
There are no answers, however, to the added risk of data breaches and the extra expenses — overly burdensome on smaller banks — that would result from the new requirements.
As to the low threshold of $600, Yellen and others say it is to prevent wealthier Americans from being able to game the system. If the threshold is too large, they argue, tax evaders of means will still be able to afford the extra accounting hassles of dividing their moneys and spreading out their transactions.
The logic is not lost on us, even if $600 still seems far too low. However, this is another case of violating the civil liberties and personal freedoms of the many to catch the wrongdoing of a comparable few. That is not how we should operate in America. The freedoms and liberties of the lawful should be protected above all else whenever possible. Certainly, in this example, it is possible.
Yellen also points out that part of the problem is that the IRS is not funded to the level needed to hire enough auditors and investigators to go after tax cheats. She has asked for $80 billion in additional funding over 10 years, which House Democrats have included in their proposed $3.5 trillion spending bill.
So before the federal government begins snooping on the bank accounts of every American, perhaps Congress should provide more funding for IRS auditors and investigators. Yellen estimates that alone could generate $200 billion over 10 years in additional tax revenue. That seems like a good start.
And while they are at it, with more manpower, the IRS should be able to do a better job of correcting auditing practices that seem to unfairly and disproportionately target poorer and often minority taxpayers, particularly in the Southern United States.
But, we digress.
At the end of the day, there are better ways to close the tax gap, such as simplifying the tax code. The bank monitoring proposal — particularly with a threshold of $600 — is a terrible idea. Key Congressional Democrats and Republicans oppose the plan, and we hope they will stand firm even as Biden, Yellen and other proponents continue to lobby for its passage.