Community Banker or Tax Collector? Can the IRS tell the Difference?

There’s a bit of news that’s floating around out there that’s been getting quite a lot of interest (pun intended) from folks in banking, and their customers. If you’re a community banker, I’m sure you know what I’m talking about. It’s a provision of the proposed American Family Plan that seeks to shrink the tax gap by requiring banks to report on their customers’ withdrawals and deposits. I’ve been following the news with great interest and concluded that while the proponents of the proposal are seeking to address a legitimate problem, they’re going about it in entirely the wrong way.

Let’s start with some of the reasoning behind this proposal. The nonpartisan policy institute, the Center for American Progress (CAP), says that the United States will lose an estimated $7 trillion over the next decade from people and corporations who cheat on the taxes they owe and that the richest 1% percent of American taxpayers are responsible for an estimated $163 billion in unpaid taxes each year. Then, I came across this interesting article from CNBC, which provided some decent background on how this came about: “IRS chief tells Elizabeth Warren: More transparent bank data can fight tax evasion.” In it, IRS Commissioner Charles Rettig, states that “relying on banks to report basic information about their customers’ deposits and withdrawals could put a big dent in annual tax evasion” and believes that “more rigorous disclosures from the nation’s banks could help recoup billions in owed revenues.” 

Okay. While I agree that the federal government, and all of us, could benefit from the IRS successfully collecting taxes owed, relying on banks is not the solution. This is where the IRS and I — along with the banking industry, banking customers, and many elected officials — see things very differently.

This past May, a coalition of industry associations — including the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Credit Union National Association, Independent Community Bankers of America, National Association of Federally-Insured Credit Unions, and the National Bankers Association — made this argument to the U.S. Senate Committee on Finance: “The costs and other burdens imposed to collect and report account flow information would surpass the potential benefits from such a reporting scheme. New reporting would appear to require material development costs and process additions for financial institutions, as well as significant reconciliation and compliance burden on impacted taxpayers.”

As you are no doubt aware, the Independent Community Bankers of America (ICBA), has also jumped in with both feet. They’ve even launched a “Send a Letter to Biden”  campaign. “If community bankers weren’t busy enough continuing their heroic economic response to the pandemic, a recent proposal to impose new IRS reporting mandates on customer bank accounts has become a major advocacy priority.” The proposal, the site goes onto say, “is a threat to consumer privacy, will increase taxpayer complexity and confusion, channel more information into the IRS than it can process,” and more. 

GQ Magazine, in a piece entitled, “The IRS Admits It Doesn’t Audit the Rich Because It’s Too Hard,” actually summed up beautifully… and you needn’t even read beyond the article’s title.  But, reading the first paragraph is well worth your time:

“The Internal Revenue Service is in a bind. The agency's job is to collect the taxes that fund everything else in the government, from Social Security to the Post Office to Medicaid. But the IRS is struggling: Americans owe a cumulative $131 billion in unpaid taxes. The bulk of that money is owed by the wealthiest people in the country, yet the IRS isn't attempting to collect it from them. Instead, as IRS Commissioner Charles Rettig confirmed in a letter to Congress recently, the agency literally can't afford to audit the rich, so it's pursuing the poor instead.”

How, and why, did this happen?

Over the past few years, the chance of getting audited has grown slimmer and slimmer.

For most Americans, the chance of getting audited is less than 0.5 - 0.6%. For reasons pointed out by GQ, it’s those who make little that are most often the IRS’s audit targets. “This,” says GQ, “is because many of these taxpayers (those with incomes of $25,000 or less) claim the earned income tax credit and the IRS audits them to ensure that the credit is not being claimed fraudulently.”  What we’re seeing now is the lowest audit rate among high income individuals — those earning between $1 and $5 million annually — since 2004. What happened? With less funding and an increase in workload, the IRS simply isn’t equipped to do the job on its own.

Who can help? The banking industry!?

I agree with Forbes Magazine’s assessment in Under Biden Plan, The IRS Would Know A Lot More About Your Bank Accounts”:

“…the IRS will know about all of your bank accounts, whether you earned income on that account or not, how much is in the account in a given year, and how much was transferred in and out of the account. It is unclear how this would work, but what is clear is that this new reporting obligation will create a massive compliance effort on the part of financial institutions and eliminate a massive blind spot that the IRS is currently enduring.” This is both an invasion of privacy and an unnecessary burden on financial institutions.

The proposal is facing serious opposition not only from the banking industry and banking customers, but from state legislatures across the nation, as well. And rightfully so. In Maine for instance, according to Forbes, Representative John Andrews called the proposal “an unprecedented Federal intrusion into the financial lives of every day Americans.” As strongly worded and on-the-money (as it were) his statement is, Andrews only gets halfway to the finish line. Not only is this proposal an intrusion; it’s big-hand-of-government over-reach that the fed wants to fob off on community bankers who, as the ICBA pointed out, are “busy enough” doing what community bankers should do.

I’ve been working in the banking industry for decades now. I like it. I have no interest in working for the IRS.

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