Deconstructing Senator Wyden’s “Myths vs. Facts” of the Democrats’ Financial Account Reporting Regime

Chairman Ron Wyden (D-OR) and the Senate Finance Committee released a perplexing and misleading “Myths vs. Facts” piece on the Democrats’ plan for increased reporting of financial account information. The proposal, which is expected to be included in the Senate’s version of the reconciliation package, would require financial institutions to share new financial data with the Internal Revenue Service (IRS) about any accounts with net inflows and outflows exceeding a certain level. This threshold was originally set at $600, but Democrats have now said it will be raised to $10,000.

Lawmakers say their plan is intended to target wealthy individuals whom they accuse of underreporting income levels to the IRS. However, this data collection proposal, even if scaled back, has the potential to impact millions of average earners, exposing even Americans who pay their taxes promptly and correctly to IRS intimidation.

The best way to settle the question of what the proposal would do is to release the plan. Yet  Senate Democrats have not yet shared any legislative text that could be evaluated. Even without exact details, many problems  with the “Myths vs. Facts” document and the financial reporting scheme are easily identifiable.

Account Threshold

The piece claims that it is a “myth” that every account with more than $600 would be reported. However, that was the original proposal released by the Biden Administration:

This proposal would create a comprehensive financial account information reporting regime. Financial institutions would report data on financial accounts in an information return. The annual return will report gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner. This requirement would apply to all business and personal accounts from financial institutions, including bank, loan, and investment accounts, with the exception of accounts below a low de minimis gross flow threshold of $600 or fair market value of $600.

The theory behind the proposal is that wealthy people are hiding income and providing financial account information to the IRS will increase compliance with tax laws. But this proposal would capture data of millions of everyday taxpayers. Because of the privacy concerns this raised, the Democrats are now scaling back the plan.

The Treasury Department now says that the threshold has been raised to $10,000 and that the modified proposal “carves out wage and salary earners and federal program beneficiaries, such that only those accruing other forms of income in opaque ways are a part of the reporting regime.” For example, this will now exempt Social Security and wages through certain payroll companies. While it is not entirely clear from the Treasury’s language, the Washington Post reports that the wage and benefits income exemptions will also apply toward the withdrawal threshold. Even so, a reporting regime based on gross inflows and outflows still runs the risk of capturing information on millions of Americans across income levels. It is unlikely this would significantly reduce the number of taxpayers swept up in the data dragnet.

The Tax Gap

The “Myth v. Fact” document cites a $7 trillion tax gap. This is the ten-year figure estimated by the Treasury Department and noted in a publication earlier this year. The report did not include details on how this estimate was determined.

The IRS last released an official estimate of the size of the tax gap two years ago, using tax data from 2011-2013. This set the size of the tax gap at $381 billion after factoring in late payments and enforcement efforts. It is unclear whether this estimate took more recent tax laws into account that could have reduced the tax gap. However, the rise of cryptocurrency is also believed to have increased the tax gap and was also probably not figured into the IRS calculation. In an analysis of issues surrounding the tax gap calculation earlier this year, NTUF concluded it was probably somewhere in the range of $400-600 billion. In that paper, NTUF also noted:

When it comes to the tax gap, efforts to close it should be grounded in data-derived expectations about what revenue actually could be gleaned from such an effort, not pie-in-the-sky estimates. And perhaps more importantly, it should be done with a keen understanding of the IRS’s structural failures and a comprehensive plan to address them before giving them greater audit and enforcement responsibilities.

Compliance Costs

In addition to making the text of the proposal publicly available, lawmakers need to allow the Congressional Budget Office (CBO) time to analyze the impacts of the proposal before holding a vote on the reconciliation package. In addition to estimating the budgetary impacts of legislative proposals, CBO is also required to report on unfunded mandates. Requirements for new information reporting to the IRS constitutes an unfunded mandate.

A giveaway that there are problems in a “Myth vs. Fact” piece is that it indulges in irrational hyperbole, like this odd claim:

Fact: The biggest and most powerful banks in the world want Americans to believe they’re still relying on legal pads and an abacus to perform basic functions.

Banks want consumers to be assured that their money and financial data are secured and protected with the most cutting-edge and effective technology. The Wyden document says the proposal will not raise taxes on those making less than $400,000. But if there are unfunded mandates imposed on banks under this proposal, account holders could see higher fees as a result. There are also privacy concerns that the proposal would erode consumer confidence and undermine efforts underway to encourage the unbanked to open savings and checking accounts.

The Proposal Targets More than Just Unreported Income

The main argument for this proposal is that lawmakers want the IRS to have information about potentially unreported income. But lawmakers also want the IRS to know what people are spending in addition to deposits. They want access to the total outflows from each account, whether it be for debit purchases or transfers from a checking to a savings account.

The original Treasury proposal notes that providing account outflow data will “increase the visibility of ... deductible expenses to the IRS.” They assume that people are deducting more expenses than they should on their taxes and want to see whether outflows correspond with claimed deductions. 

But a top line number will not shed light on that. Moreover, the IRS should be able to sift through data it already has access to via tax forms to identify deduction totals that are out of line with the average amount for a given range of reported income. Tracking account outflow data runs the risk of raising false positives on innocent taxpayers.

But there is also another wrinkle to the proposal: banks would also have to report cash, account transfers, and interactions of a given account with foreign institutions. This will impose additional burdens on top of the onerous Foreign Account Tax Compliance Act (FATCA) reporting regime.

Could Data Reporting Lead to Lower Taxes?

The “Myth vs. Fact” document argues that the increased reporting of income to the IRS could lead to lower taxes for some people, arguing that “when low-income taxpayers report their earned income ... they can often claim larger tax refunds because of the earned income tax credit.”

The earned income tax credit (EITC) is a refundable credit, a type of credit designed for low-income earners. To the extent that the credit exceeds a filer’s income tax liability, an eligible person can get a check for the amount of the “refundable” portion of the credit. In 2018, the most recent year for which the IRS has released complete data, 26.5 million returns claimed the EITC for a total of $64.9 billion, of which $56.2 billion (87 percent) was paid out for the refundable portion. That is a federal entitlement program, not a tax cut.

But the document’s logic also cuts both ways. The EITC is designed to gradually phase out as filers’ income increases. Just as identifying previously unreported income could increase the number of filers eligible for the EITC, it would be just as likely to identify previously unreported sources of income that push a filer over the income threshold to claim the EITC. This rather transparently half-baked logic shouldn’t fool anyone. 

Beware of Enforcement

Lawmakers are claiming that those earning under $400,000 will not see higher audit rates. That claim is either a falsehood, or  a wink and a nod to certain filers that they might be able to get away with low-level tax avoidance. If that exclusion is codified, that would undermine fairness in the tax system by carving out loopholes for overlooked underpayment and potentially increasing the improper payment rates associated with refundable tax credits. If it is not, lawmakers have little basis for this claim. After all, in FY 2018, filers claiming the EITC were more than twice as likely to be subjected to an audit.

The sole purpose of the account reporting proposal is to make it easier for the IRS to lean on taxpayers for more information. As the original Biden administration proposal makes it clear that the Secretary of the Treasury “would be given broad authority to issue regulations necessary to implement this proposal.” 

Americans for Prosperity’s Kurt Couchman warns that “if the IRS gets the green light *just* for “gross inflows and outflows,” 26 U.S.C. 6001 would give it plausible cause (at least under the Chevron doctrine) to dragnet EVERYTHING, down to individual transactions.” That section of the U.S. code of tax law pertains to notice of regulations requiring records and stipulates:

Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.

The IRS could decide to build a demand letter regime off of reported account data, issuing automated demand letters to tens of thousands where there is a discrepancy of some kind. If the demand letters do not resolve the dispute raised by the IRS, taxpayers could be subjected to audits.


Supporters of this plan seem to take the position that if taxpayers have done nothing wrong and are in compliance with tax laws, then they should have no concerns about this new reporting regime. But as taxpayers who have been caught up in costly disputes with the IRS know all too well, sometimes innocence is not enough to protect you from harassment. 

Senator Wyden’s “Myth vs. Fact” piece glosses over several concerns and details about the proposal and completely leaves aside serious problems about the administration of this program. Given the history, there is good reason to reject giving the IRS additional snooping authority.