Congress has not yet passed President Biden’s Build Back Better plan,H.R. 5376, as Democrats struggle toget buy-in froma majority oftheir members. Unlike the$1.2 trillionInfrastructure Investment and Jobs Act, which passed Congress with bipartisan support on November5, no Republicans are supporting the larger $1.75 trillion package that uses tax increases and new compliance measures to pay for the legislation.
A controversial provision of the Build Back Better bill is bank account reporting, the requirement that financial institutions report total bank account outflows and inflows from a taxpayer’s accounts on a yearly basis. The original threshold for reporting was set at $600 but now has been raised to $10,000. Bank reporting would become effective for the tax year 2023.
Because of the controversy surrounding bank account reportingand the“widespread mischaracterization” of the plan, the Treasury Department hastaken the unusual step of releasingafact sheetin advance of bill passagethat explains what the provision does and does not do. Below are key points about thereporting requirementas described by Treasury.
How Reporting Works
- Two data points would be reportable by financial institutions: the total amount of funds deposited into a bank account and the total amount withdrawn over the course of a year if $10,000 or more in the aggregate.
- Banks can round the figures they report to the nearest $1,000 instead of reporting exact figures.
What is NotRequired
- Exempts wages, salaries and federal benefits from reporting.
- Banks do not have to provide information on individual transactions.
Examples:
- Taxpayer A has $56,000 in direct deposits from his salary each year and no other income. Outflows are under $56,000. Taxpayer A’s account would not be subject to bank account reporting.
- Taxpayer B reports $10,000 of income on his tax return but has $10 million of flows in and out of her bank account. Taxpayer B is subject to bank account reporting. Treasury notes this summary information will help flag for the IRS that the taxpayer may be underreporting her income.
Senate Finance Committee Chairman Ron Wyden, D-Ore.,explainedfurther that there will be no additional reporting if a taxpayer does nothave$10,000 abovethe taxpayer’spaycheck, Social Security income, orother federal benefitscoming in or going out.If an individual spends a significant amountfrom savingsfor a major purchase, therewill be no additional reportingifthe amount of money coming into the account does not exceed wages +$10,000, Wyden said.
Treasury Justification
Treasury emphasized that the provision is“extremelylimited”and fits with current reporting requirements of over $10 in interest a year andthereporting of $10,000 cash transactions. Treasury also notes thatthe IRS already has information on wage and salary income andonfederal benefitsfrom W-2s and 1099s, soonly those “accruing other forms of income in opaque ways are a part of the reporting regime…”
Treasury insists the provision will not involve raisingtaxes on any taxpayers.Instead, it makes it easier to collect taxes that would be owed if incomewasproperly reported.IRS resources and information will be focused on detecting and addressing high-income evasion, Treasury contends,andaudit rates will not rise for taxpayers making under $400,000 a year.
Finally, Treasury saysthis reporting would eliminate the existing disparity between American workers, whose income is already reportedtothe IRS,and wealthy individuals who earn income in ways not visible to the IRS.
Bankers’ Group Opposed
The American Bankers Association(ABA)opposed the measure, calling it “bad tax policy”in aletterto Housecongressionalleaders.The group says the provision“raises significant concerns regarding the privacy of personal financial information, cost of implementation and impact on average Americans.”Financial institutions willbe required to develop the necessary technology and processes to identify the accounts, report to the IRS and customers and educate customers and bank staff on what the information does (and does not) mean, the group notes.The ABA offers this example of the reach of the reporting requirement.
Examples:Consider a taxpayer who earns $18 an hour, has no other income and pays rent and other living expenses – the sum of gross inflows and outflows after taxes would be around $60,000.Also, self-employed contractors who buy materials and install them for customers will commonly have gross inflows and outflows that far exceed the income they earnand will be subject to reporting.
Conclusion
The reporting provisionis set totake effectin2023. Reporting will be doneonForm 1099-INT, the formalreadyused to report interest.Although H.R. 5376 is supposed to be voted on by the end of November, as FD Insights went to press, it was still unclear whether the legislation will pass at all.If it does, the bank reporting requirement with the higher threshold is sure to be included.
