How Many Americans Will Be Subject to the New Tax Reporting on Bank Accounts?

Congressional Democrats and the Biden White House are close to agreement on a major expansion of IRS power: requiring banks to send the IRS information on accounts with more than a certain level of activity. The proposal is not yet included in the $3.5 trillion budget reconciliation bill, but will likely be added soon once the details are sorted out.

One of the biggest of those details is: how many Americans will be subject to this reporting?

If the Treasury Department gets its way, essentially all Americans. The Treasury Department’s original proposal from May recommended applying the bank reporting requirement to all business and personal accounts except those “below a low de minimis gross flow threshold of $600 or fair market value of $600.” This would encompass essentially every bank account in the country, certainly all businesses as well as any individual with more than about $50 a month of inflow or outflow transactions.

After the first draft of the budget bill was released and the proposal was not included, the Treasury Department stepped up its efforts. A letter to Rep. Richard Neal (D-MA) warned that failing to adopt the reporting proposal would “lower the estimated revenue raised.” The letter explained that additional IRS funding and the new bank reporting requirement “would lead to about $640 billion in additional revenue over the budget window” but “a narrower reporting regime would be lower, perhaps in the range of $200-$250 billion over the ten-year budget window.”

The Treasury’s initial idea landed with a thud. It was immediately opposed by banks and credit unions who see implementation problems, privacy advocates with concerns about taxpayer data security, and taxpayer advocates such as yours truly who see the IRS being awash in a mountain of data that has little bearing on what people put on their tax returns. Even state treasurers and auditors sent a letter to Washington leaders saying “There is zero quantitative or qualitative evidence that this proposed measure will aid in collecting taxes from tax evaders.” 

What would likely happen is the IRS using the same tactic they use now: letting their computers look for perceived inconsistencies, then sending out a flurry of automated letters to taxpayers demanding they explain it or pay more tax to make it a threatened audit go away. $250 billion is a lot of money, too much to just be collected from the richest of the rich.

The pressure didn’t work on Rep. Neal, who told reporters this week that he wants to see a $10,000 threshold instead and that Sen. Ron Wyden (D-OR) is in agreement with him: “The idea is to build in guardrails so that people at the lower end are not targeted. This is about people at the upper end.” The Wall Street Journal noted that Rep. Don Beyer (D-VA) was inclined to support a bank reporting requirement but a leak of taxpayer data from the IRS to the group ProPublica “sapped support because of privacy concerns.”

But does setting a level $10,000 of inflow or outflow activity — about $830 a month — protect most Americans from a new bank reporting requirement? Unlikely, since $10,000 will be hit by anyone who earns even minimum wage and direct-deposits their paycheck, or has a rent payment of at least $850 a month. In fact, someone’s rent payment need not be nearly that high when accounting for the myriad of other necessities people must purchase just to get by.

The median small business has inflow and outflow of $755 a day, so they’ll hit $10,000 in about two weeks. The median checking account balance in the U.S. is $3,400 at any one time, and based on the rule of thumb that your balance should be one to two months’ worth of expenses, that’s $20,000 of inflow and $20,000 of outflow minimum for most Americans.

It’s possible that lawmakers envision a threshold based on some sort of an average of an account’s balance over the course of a year. In other words, if someone’s account averaged $9,999 it would not be subject to reporting requirements, and if it averaged $10,001 it would. This, too, would ensnare an enormous number of Americans, including nearly all pass-through businesses (which themselves comprise over 90 percent of American businesses, comprising some 57 percent of employment) and any individual of roughly middle-class means and above. 

Perhaps what the policymakers are envisioning is a transaction threshold of $10,000, which would be limited to high-income people in a way that a churn or balance threshold would not. Existing federal law requires financial institutions to report any deposits of $10,000 or more to Treasury officials who combat money laundering and financial crimes. The law also forbids structuring deposits to stay under the threshold. But a $10,000 transaction threshold is clearly not what Treasury wants, as that would not apply broadly to most Americans.

Perhaps Congress may try to have its cake and eat it too, by establishing some sort of low threshold like $10,000 but then exempting normal payroll deposits or other types of common transactions from counting toward that number. This may represent the worst of all worlds: maximum complexity, inequity, and opportunities for gaming. Any system that attempts to separate some dollars from others for information reporting purposes is asking for a different kind of trouble from a broad-based proposal, which has troubles of its own. 

Furthermore, not every American works for a company with traditional biweekly or semi-monthly direct deposit of wages and disadvantaging them compared to their fellow citizens is unfair. Finally, any exemption system would establish strong incentives, particularly for the wealthy that employ high-powered accountants and attorneys, to redefine every dollar as exempt.

If a bank reporting requirement structured in any of these ways is enacted, it would risk ensnaring most taxpayers and essentially every small business. It’s a sad fact that when the IRS sends a demand letter to taxpayers, the taxpayer’s first instinct — even if they’re not in the wrong — is to make it go away as fast as possible by paying it. Much has been said about President Biden’s pledge not to raise taxes on Americans who earn less than $400,000 a year, but that’s exactly who will bear the brunt of a supercharged IRS bank information dragnet.