Biden’s IRS proposal could mark the end of privacy in banking

President Biden’s tax compliance initiatives seek to close the ‘tax gap’ between taxes owed to the government and the taxes actually paid. To achieve this, financial institutions would have to provide information about the total outflows and inflows for all accounts holding $600 or more to the IRS. 

All of this  sounds innocent enough, even laudable, when the IRS claims that this would add $700 billion in additional tax revenue over the next decade. But the IRS will only be able to handle all of this essential information if its aged IT systems are updated, which will inevitably cost billions. But the administration believes the investment to update the system and find sufficient, highly skilled personnel will bring quick returns. 

Biden’s proposal has the enthusiastic support of Treasury Secretary Janet Yellen, who wrote a letter to House Speaker Nancy Pelosi (D-Calif.) and Richard Neal (D-Mass.), chairman of the House of Ways and Means Committee, endorsing the idea. 

Never mind all that. The real result, given Biden’s $600 threshold, will be to flood the IRS with reporting on over 140 million bank accounts and to end financial privacy, given that the IRS cannot handle the tax returns it already receives. The Treasury notes that it already receives third party confirmation of wages, salaries and pensions when taxes are deducted at-source. In these cases, compliance rates are over 95 percent. That applies to over 50 percent of those in employment and to millions of pensioners. 

So why insist that financial institutions should report on all the accounts they manage? What is the point of burdening them with another layer of reporting? It looks as though the Treasury is cutting off the branch on which it is sitting. Such a requirement has nothing to do with tax evasion by complex partnerships or the cleverly constructed tax schemes for the well-off or for multinational companies. The additional avalanche of reports could simply get in the way. 

Some Democrats are trying to relieve banks of some of the burden by setting the threshold at a somewhat higher level, but still very low, perhaps $10,000. If so, they would do well to examine those in the lowest levels of income (although not all in these brackets will have a bank account). They would soon find that the $10,000 threshold easily catches individuals at the lowest federal poverty level of $12,880, and that over 80 percent of their income is spent on necessities such as housing, transportation, food, healthcare and education. 

The proposal gives the IRS extensive access to an individual’s account. It is difficult to know why the administration wants to know the contents of anyone’s grocery bill. But it is easy to see the temptation it would create for bureaucracies to interfere in your life. Maybe you are buying too much beef or sugary drinks. Maybe you are buying too much gas or making political donations they do not like.

Furthermore, the IRS already requires information, not only about every employee or contractor, but also about anyone who pays or receives interest or makes capital gains. So what is the underlying reason for this extension of reporting? The next step could be to tap into the Automated Clearing House system, which has the image and the data for every check — physical or electronic — and covers routing numbers, accounts, amounts paid and the payee. All the bank has to do is to send a copy of whatever it sends to the ACH service, to the IRS. The temptation for the government could be to use the more precise data on patterns of expenditure, to interfere in people’s private affairs.  Such big data is always valuable … for private companies as well.

Individual privacy over bank accounts and expenditures should be safely guarded. Biden’s proposals would end it. But that is not the only source of risk. Central banks holding digital currency within individual accounts would also have enormous powers, if the Federal Reserve succumbs to such pressures. It would lead to the creation of a huge bureaucracy with the power to decide what loans should be made and to whom. 

That would, of course, make the power of the IRS much greater,  at the price not only of privacy, but also control over the money each individual has earned, or, to which they are entitled.

Dr. Oonagh McDonald is a senior advisor at Crito Capital LLC. She is a former British Member of Parliament and a former board member of the UK Financial Services Authority. She was a consultant for financial regulation with the Asian Development Bank and has been a consultant for USAID. She is a former independent director of both commercial financial institutions and regulatory authorities. She is author of a number of articles and books, of which the latest is, “Cryptocurrencies: Money, Trust and Regulation.” She was awarded CBE (Commander of the British Empire) by the Queen for her contributions to financial regulation.