IRS May Get Copies of your Bank Account Information and Your Credit Card Transactions From Banks and Payment Processors

In May 2021 the Department of the Treasury published “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals”. These proposals are contained in “The American Jobs Plan” and “The American Families Plan”. This administration has quite a few proposals that will have a significant impact, particularly on high earners and corporations. In this article I would like to focus on the proposal to “Introduce comprehensive financial account reporting to improve tax compliance”

This proposal doesn’t impose additional filing burdens on individuals, but it does create substantial filing obligations for financial institutions. Under this proposal, financial institutions would have to report gross inflows and outflows, detailing transactions of physical cash, transactions with foreign accounts, and transfers to and from another account with the same owner. These requirements would be applicable to both individual accounts and business accounts “including bank, loan, and investment accounts”.  In an effort to support the recent push to tax crypto currency transactions, the proposal also specifically mentions that similar reporting requirements would apply to crypto asset exchanges and custodians. This crypto asset reporting would apply to both brokers and businesses that receive crypto currency worth more than $10,000.

It is also significant that these regulations will extend to ‘payment settlement entities’ which effectively means any credit card payment processors. These obligations will extend to gross receipts, gross purchases, physical cash, foreign transactions, but also to all transfer inflows and outflows.

A taxpayer’s bank accounts and credit card accounts aren’t exactly secret when it comes to scrutinized tax filings, and if you’ve ever been through an audit, you know that these statements are some of the first documents that you turn over to the IRS. There is, however, an enormous difference between providing this information to the IRS to substantiate deductions, and having the IRS receive all of this data annually directly from the financial institutions.

This type of account reporting is not entirely without precedent. This reporting is reminiscent of the reporting obligations applicable to U.S. persons who own foreign accounts or those who send money to foreign entities. Foreign financial institutions with U.S. customers are required to provide account data to the IRS, and U.S. persons are required to disclose all of their foreign accounts and assets (if they are above certain thresholds i.e. $10,000 and $50,000). The foreign account reporting was a large step in the direction of the IRS requiring information that isn’t directly related to determining the amount of tax owed, and the fear that the scope of information (even non-tax information) required on tax filings will continue to increase is justified. For example, you’ll note that 2020 was the first year that there was a field with the following question on every 1040 “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Now clearly the IRS has been motivated to target under-reported income from crypto currency transactions, but questions like these go beyond income reporting. Just like the foreign account field at the bottom of schedule B, the IRS is expecting individuals to flag themselves for further scrutiny by accurately responding to this prompt (at least this time they had the good sense to put this type of ‘gotcha’ question on the first page of the 1040 rather than buried on the bottom of a schedule that not every individual needs).

Can They Use This Data Effectively?

The IRS has been struggling to effectively weaponize the information they’ve been receiving from foreign financial institutions for the last ten years, and there is good reason to believe that they will have similar struggles in utilizing the information generated by this proposal. To begin with, the quantity of data captured by this proposal is immense. We are talking about billions of documents. But it really is only a matter of time before the IRS takes their systems out of the 1980s and updates them to the current standards. I’m no data analyst/engineer, but I have to believe that with the amount of data the IRS already has and with the amount of raw data that this proposal will create, that the IRS would be able to bring on talented engineers/analysts to develop automated procedures that could capture nearly all of the under-reported income and over-reported expenses for most individuals and businesses. The problem is…. that this won’t be done well. Giving this information to the IRS will have results similar to those from giving a flamethrower to a child. They’ll be excited to have it and the immediate impact of its use will be people getting hurt. Just as was the case with the foreign account informational filings, the IRS will cast too wide of a net, a net that will somehow miss most of the intended targets, and instead they will scoop up countless people with minor errors on their filings.

 Of course Government projections disagree, and they believe this proposal will generate billions and billions of additional tax revenue annually:

 In terms of their ability to effectively manage this data, this proposal is allocating money toward that end: “Additional IT tools will help support a staff capable of deploying new analytical techniques; investing in developing machine learning capabilities will enable the IRS to leverage the information it collects to better identify tax returns for compliance review. The proposed IT investment includes $4.5 billion to implement a new information reporting regime.”

Privacy?

Utilizing this data to assess taxes isn’t the only potential concern here. Do you think the IRS should be able to access data on every dollar that goes into or out of your (digital) pockets? A lot of people put a lot of value on privacy and believe that so long as they’re accurately meeting their tax filing obligations (and not otherwise violating the law) that their financial decisions should remain private. This doesn’t sound like an unreasonable expectation to me, but it clearly is currently an expectation that is in jeopardy.

I don’t practice constitutional law and I’m really not qualified to speak to whether the gathering of this data is a violation of our constitutional rights. I am, however, a tax attorney that has watched as the IRS mismanaged a similar initiative, albeit much smaller in scope, in the context of foreign informational reporting, and if this proposal is handled similarly, you can expect a lot of headaches for ordinary folks as well as an amount of additional tax revenue that is much smaller than the cost of the implementing this proposal.