IRS Bank Supervision Proposal Targets Most Americans
Financial surveillance in the United States may soon reach an unprecedented level considering the Biden Administration has asked for the reporting threshold to be lowered to just $600 and expanded to
Bankers, economists, and fans of crime dramas all know that the IRS keeps tabs on cash deposits and withdrawals of $10,000 or more. However, financial surveillance in the United States may soon reach an unprecedented level considering the Biden Administration has asked for the reporting threshold to be lowered to just $600 and expanded to non-bank entities like crypto exchanges or payment services (i.e., Coinbase or Venmo).
The proposal is being justified as a way to provide the IRS with additional information to close the $600 billion annual tax gap (the difference between taxes that are owed and collected). The Treasury Department estimates that the new reporting regime would yield $460 billion in tax revenue over ten years—a 7.6% dent in the tax gap.
Although many have spoken out against the proposal on the grounds that it will disproportionately affect lower-income account holders, the Treasury has argued that this approach is only designed to target high-income earners that are underreporting their tax liabilities. Treasury Secretary Janet Yellen even suggested that “compliant taxpayers” would benefit because they would have a lower risk of a “costly and burdensome audit.”
Yellen might be right, but that benefit is not absent accompanying costs. And those costs are large, to say the least. Although the $600 threshold is only a proposal at this stage, the risks to both privacy and the IRS itself should have been enough to take such a consideration off the table before the ink had dried.
Financial Privacy at Risk
Each year, the IRS experiences 1.4 billion cyberattacks. The IRS even suffered a breach as recently as this past June. Dramatically increasing the information collected would only make the IRS a more appealing target for cybercrimes.
The private sector is not immune from hacks. However, the decentralization of information across companies is in and of itself a deterrent to criminals. Any hack would need to be repeated across systems and each system would only hold a fraction of the information. Pooling all the information by having the IRS monitoring the vast majority of the bank accounts held by the American people would only serve to make the IRS a more valuable target.
It seems that, like the scientists on Isla Nublar, the IRS was so preoccupied with thinking about whether or not they could pull off the proposal that they never stopped to think about if they should.
The IRS Under Pressure
However, privacy concerns aside, it’s not even clear that the IRS could handle the weight of the proposal. The IRS was put under immense pressure during the pandemic. Stimulus checks went missing, tax refunds were delayed, and phone calls went unanswered. Natasha Sarin, deputy assistant secretary for the Treasury, described it well when she wrote, “Currently, an under-staffed IRS, with outdated technology, is unable to collect 15 percent of taxes that are owed, and a lack of resources means that audit rates have fallen across the board.”
Opening the floodgates by lowering the reporting threshold to $600 would risk putting the IRS completely underwater. With roughly 76,000 full-time employees, the IRS is far from a “small agency,” but increasing its oversight to include nearly all banking transactions would require an unprecedented expansion of its workforce, budget, and resources.
Good News with a Caveat
With all of that said, the good news is that the proposal is just that—a proposal. The Treasury itself seems to lack confidence in its feasibility considering it was one of the last proposals listed in the 114-page document. And it’s unlikely to pick up steam now that over 140 congressional representatives signed on to a letter expressing their concern.
However, there is a caveat: there is still the possibility that the proposal could emerge again in the future in a scaled-back form. Asking for a threshold of “just $5,000” might even seem reasonable relative to the $600 proposal. Some may even celebrate the compromise. So while there is still much to be done to make sure the current proposal is challenged appropriately, those concerned by it would be wise to keep one eye on the horizon.