Fight Over U.S. Financial Account Flow Reporting Proposal Heats Up

September 20, 2021
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Tensions surrounding a new proposal, aimed at closing the tax gap by creating a massive reporting obligation for financial account flows, are intensifying. The U.S. Treasury Secretary wants President Biden to include the proposal in his spending bill, but a group of Republican senators have introduced a bill to stop that from happening.

Tensions surrounding a new proposal, aimed at closing the tax gap by creating a massive reporting obligation for financial account flows, are intensifying. The U.S. Treasury Secretary wants President Biden to include the proposal in his spending bill, but a group of Republican senators have introduced a bill to stop that from happening.

In May, the U.S. Department of Treasury published General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, also known as the Green Book, which set out tax proposals for the administration’s budget for 2022.

In the document, the Treasury plans to close the tax gap, i.e. the difference between the amount of tax that people should pay and what they actually pay.

Among its plans, the Treasury proposes to set up a comprehensive financial account information reporting regime. This would, if it came into being, require every financial institution to report data about financial accounts to the Internal Revenue Service (IRS) in an annual information return.

If this becomes law, financial institutions (which include banks, money transmitters and virtual currency exchanges) will have to report gross inflows and outflows in all business and personal accounts above a de minimis gross flow threshold of $600 or a fair market value of $600. Each report will include information about physical cash, transactions with a foreign account and transfers to and from another account with the same owner.

The Treasury’s document makes it explicit that “other accounts with characteristics similar to financial institution accounts will be covered under this information reporting regime.”

Payment settlement entities will have to collect Taxpayer Identification Numbers (TINs) and file a revised form expanded to all payee accounts above the said de minimis threshold.

The reporting requirements will not exempt crypto-asset exchanges and custodians either. These entities will also have to comply with the reporting requirements.

In addition to that, the Treasury seeks to impose separate reporting requirements for tax-collection purposes on businesses that receive crypto-assets in transactions with a fair market value of more than $10,000.

The proposal aims to empower the Treasury to issue implementing regulations and aims to become effective in the tax year of 2023.

The proposals included in the Green Book are not to be found in any bill as yet. Lawmakers have to introduce each of them and they then have to make their way through Congress before they can become law.

Last week, Treasury Secretary Janet Yellen sent a letter to House Ways and Means Committee chair Richard Neal (D-MA) expressing “enthusiastic support” for the financial institution reporting provisions. She explained that the proposal was designed to minimize costs to taxpayers and financial institutions alike.

In response to the letter, the American Bankers Association (ABA) has called on banks and their customers “to continue their grassroots efforts to ensure that this provision stays out of any future versions of the bill.”

The bank lobby group argues that the proposal raises serious questions about data privacy and data security and threatens to impose new costs on small businesses and financial institutions.

In addition, the ABA is worried that the reporting regime might undermine trust in the banking system, pushing more people away from the regulated financial services industry and countering the efforts of many people to include more un/underbanked Americans in the financial system.

Some of these concerns are echoed among members of Congress. In an op-ed published last Wednesday, Representative Warren Davidson (R-OH) reminded the public of the cybersecurity threats that such a reporting regime might create.

“Being only six years removed from 700,000 Americans having their taxpayer accounts hacked, and considering there are currently 1.4 billion attempted cyber-attacks against the IRS each year, Americans’ concerns are more than justified.”

To issue these and other concerns, last week a group of Republican lawmakers introduced the Tax Gap Reform and Internal Revenue Service (IRS) Enforcement Act.

The bill contains safeguards that dictate that audits of taxpayers who make less than $400,000 per year will not increase. It also proposes to prohibit the establishment of new bank reporting requirements.

Instead of asking for third-party reporting, the bill proposes to create “smarter IRS enforcement” by requiring the IRS to use existing data and tools to improve its corporate audit selection process and come down harder on high-income non-filers.

The bill and its companion were introduced by U.S. Senate Finance Committee ranking member Mike Crapo (R-ID) in the Senate and by U.S. House Ways and Means Republican leader Kevin Brady (R-TX) in the House. It lists 14 senators and 17 representatives from the Republican caucus as co-sponsors.

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