Below is a lightly edited transcript of the podcast:
JOHN HELTMAN: Ladies and gentlemen, I present to you an attack ad.
AMERICAN ACTION NETWORK AD: If Joe Biden gets his way they're coming: IRS agents. Biden's massive tax increase plan includes a staggering 80 billion to help recruit an army of IRS agents. Agents aggressively coming for every dime they can grab and your house and that are small businesses.
HELTMAN: Nobody likes taxes or paying them — we fought a Revolutionary War over taxes, after all. But, like death, taxes are inevitable and necessary. So when the Biden administration floated an idea earlier this year that would require banks to disclose certain customer account information to the Internal Revenue Service, banks pushed back — as did the American Action Network, a conservative advocacy group, who produced the ad you just heard, as well as this one.
HELTMAN: Disliking the IRS is as American as apple pie.
MARGE SIMPSON: Ooh, look Homer — the IRS.
HOMER SIMPSON: BOOOOO!
IRS WORKER: Oh, boo yourself.
HELTMAN: But there is a real problem that this proposal is meant to solve, namely narrowing the discrepancy between what the government is owed in taxes and what it actually collects. But the pushback from the banking industry and the administration’s political opponents was fierce and not especially nuanced. So is this idea of requiring banks to disclose more account data just a political spat that will eventually resolve one way or another, or is this a real technical and/or legal issue here that needs more unpacking?
From American Banker, I’m John Heltman, and this is Bankshot, a podcast about banks, finance, and the world we live in.
BRENDAN PEDERSEN: I was at a wedding a little while ago, and someone made this mistake of asking what I do for a living. And I explained that I cover bank regulation for American Banker, and they said, Oh, so you're covering, you know, some of like that build back better stuff? And I said, Yeah. And he said, didn't I hear something about the IRS wanting people's transaction data? I was like, "NO!"
HELTMAN: Please welcome back to the program my colleague Brendan Pedersen.
PEDERSEN: That was the rest of that man's evening was me yelling about that was ... not really, but you know, like, that misconception.
HELTMAN: Public policy of any kind doesn’t have a straightforward trajectory from idea to established law — ideas kind of float and congeal over time until eventually someone decides to champion it and codify it into some kind of law or regulation. And in the case of this reporting proposal, the first public iteration of this IRS reporting rule was articulated this past May by the Treasury Department.
PEDERSEN: This started as far as anyone is aware, in May of this year of 2021, when the Treasury Department put out what they call the
HELTMAN: Are you referring to general explanations of the administration's fiscal year 2022 revenue proposals?
PEDERSEN: Yeah, the one that just rolls off the tongue?
HELTMAN: Yeah, the G.O.T.A.F.R.Y. 2022.
PEDERSEN: I don't even remember what we're talking about anymore. So in that proposal, and that in that document, they're like something like, I'm not gonna remember how many pages in but it's a lot of pages. And there's a single paragraph, talking about the Treasury Department's compliance, like tax compliance strategy.
MERSKI: And looking through that green book back in June of this year. I noticed a proposal in there that would require all financial institutions to report customers transaction flows to the IRS, on checking accounts, savings accounts, loans, any financial transactions you have with your financial institution, would be tabulated and sent to the IRS as part of a reporting requirement, and they intended to raise revenue from this proposal to pay for some of the big bills in Congress.
HELTMAN: This is Paul Merski.
MERSKI: Paul Merski, Executive Vice President for Congressional Relations at the Independent Community Bankers of America. So everyone's bank accounts would have to be monitored, and that information of the flows coming in and out of those accounts would be sent to the IRS. It's really a tremendous overreach, tremendous invasion of privacy. And when the community bankers heard about this proposal, they they really needed to inform their customers of what this proposal would do. And then the opposition really expanded from there.
HELTMAN: What the proposal — at least as it was articulated in the green book — would actually do is require banks to report, QUOTE “gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner.” And that rule would apply to any account that had inflows or outflows of $600 or more. So, in essence, banks would submit to the IRS the total amount of money that came into virtually all banks accounts, as well as the total amount that went out, with information about whether inflows or outflows were to alternate accounts, foreign accounts or cash.
That’s the substance of the proposal, now here’s the context: The Biden administration has a very ambitious legislative agenda and a very narrow window of opportunity to enact that agenda, and for this entire year, the White House and Democrats in Congress have been hammering out what exactly can be achieved, first with the COVID relief package, then with the Bipartisan Infrastructure bill and now with the Build Back Better bill, which passed the House and is still being hammered out in the Senate. The administration’s agenda has many, many
MERSKI: Well, in the United States, we have a voluntary tax system, and it works extremely well. But every penny of taxes that are owed are not collected. And there are, you know, draconian ways you can get at collecting every penny in a voluntary system. And we thought that this proposal of reporting on everyone's private file Financial accounts, everyone's financial data was a bridge too far of addressing that tax gap.
HELTMAN: How big is this ... is this gap? I mean, I've heard ...
ROSSOTTI: $600 billion is the best estimate for the last year. And if you don't do anything for the next 10 years, it'd be $7 trillion.
HELTMAN: That’s Charles Rossotti.
ROSSOTTI: You've got my name. Charles Rossotti. And the only reason I'm involved in this is that I was, you know, for five years, the IRS commissioner between 1997 to 2002.
HELTMAN: You might be asking yourself, “Doesn’t the IRS already have this information anyway?” Because they always seem to know how much people make and whether or not what they submitted in their tax return is correct.
PEDERSEN: There is a major source of data that the IRS gets on most Americans that details most of what people make in the course of their jobs. And that is the tax form that is known as the W-2. If you are a salaried or just wage earner, in general, and you make basically any amount of money, wages, all the money that your company or whatever collection of companies that are giving you a W-2, that information is going straight to the IRS. What the proposal was trying to — at least according to the government, according to Treasury and the White House, and people who are generally in favor of this idea — is there are other kinds of income that just don't fall under the umbrella of W-2 that don't get reported in the normal course of business. And business is the operative word there.
ROSSOTTI: If you earn your income as your own business — whether you report that income as a individual on your return, or you have an entity, like a partnership or a business — there is some reporting, but it's essentially meaningless. And so when you look at where the tax gap is, which is the money that is owed but it's not paid, it's not for most people that are wage earners are salaried. It's almost all vast majority from as you would expect, I mean, it's logical, those people whose income is not reported put down pretty much whatever they they like to report. And it doesn't mean they're, you know, criminals or tax cheats. But I like to say to people, let's suppose that you were working for a business, and you didn't get a W-2, you just had your pay stubs every year. And then at the end, you'd say, Okay, what do I put them? Would you really be accurate? I mean, would you put down, you know, if you got an extra $500 bonus, you know, in mid-year for something, it was you remember to put that probably wouldn't be that accurate, even if you were unless you were really a good record keeper, you wouldn't be that accurate. And if you wanted to, if you wanted to cut corners, you'd be pretty easy, because you just put down whatever you want. Nobody's going to know the difference.
HELTMAN: The proposal, then, is a solution to this self-reporting loophole because it would give the IRS insight into exactly how much money someone who doesn’t file a W-2 made in a year and see whether it lines up with what they reported. And that $600 billion figure is really just an educated guess — no one knows exactly how much income is unreported, and therefore uncollected. But it isn’t like this is the first time the government has asked banks to furnish financial details to the Treasury Department.
BALLENTINE: Now banks report things to FinCEN, particularly related to currency transaction reports, all all the AML BSA requirements, banks obviously report information on W-2 and dividends and interest income.
HELTMAN: That’s James Ballentine.
BALLENTINE: James Ballentine, I'm Executive Vice President for Congressional Relations at the American Bankers Association. There's a ton of information that's already reported to the IRS, which also made us question what was this additional information that you needed beyond what you're already getting?
HELTMAN: In addition to facilitating W-2s, banks also flag cash deposits of more than $10,000 to the Financial Crime Enforcement Network, or FinCEN, and also are required to partner with law enforcement in detecting and reporting suspected financial crimes like illegal transfers and money laundering. But the banking industry fought back against this idea, and so did their customers.
BALLENTINE: Certainly this issue, whenever you're talking about taxes, whenever you mention three letters, IRS, it's very personal for individuals, and it was less the bank, less the customer being concerned about the bank, and more the customer being concerned about the customer, and what the bank being the sort of go-between between the customer and the IRS, and what role that plays. So all of the dynamics working together is really what evolved here. It was not our outreach to the customer. It was the customer outreaching to us saying, "What is this? How can I share with my member of Congress, that I have some concern based on the explanations that I've seen on it?" So the relationship between the customer and the bank we believe is solid, remains solid. This was one issue that we were both all solidly behind. And I think members of Congress heard that loud and clear.
BOLTANSKY: I think that there are real fears regarding Big Brother and those fears go across the ideological spectrum.
HELTMAN: This is Isaac Boltansky.
BOLTANSKY: My name is Isaac Boltansky. I am the policy analyst at BTIG, which is an investment bank focusing on a number of sectors including financial services. I think you can see in some Republican corners some some of the letters that you've you've seen from the Hill or concerns relating to some of the tax filing leaks that we've seen over the past year or two. Right? So you've seen that end. There also some concerns and more progressive circles regarding how this data could be used in the future. Right? And I think that there's also some, some verifiable concerns that when we talk about access to the financial system, the added concerns regarding inflows and outflows of data, for some, may keep them out of the system. And so I think just that this was easier to understand and I think that it was easier to consider some of the negative externalities that comes to ... that comes from this proposals relates to access for consumers and for how this data could be used in the future.
HELTMAN: But like to be clear, this is this. Are they asking for, like data on every transaction related to your account? Or is it just ...
PEDERSEN: NOOO! NOOOO! It's not transaction data. I got into fights with human beings on Twitter, I think, about whether or not we're talking about transaction-level data. Mitch McConnell, the Republican Leader of the Senate minority, Senate Minority Leader, Mitch McConnell, wrote
ROSSOTTI: The administration, by the time the green book came out really did address, I think, both of the, what I believe were the likely concerns, because it was very, very limited in terms of what the requirement was it really only just two summary numbers -- which, by the way, if you look at your average bank statement, they pop up on your bank statement every month, so there's not nothing new there. And then they did very clearly in the green book, if you look at it, make sure that it applied to FinTech companies, anybody that I forget how they defined it, but it was not just regulated banks. So that being the case, you know, seemed like, well, you know, this, this shouldn't be that hard. But to my surprise, actually, um, you know, as you know, they came out full on, you know, against it. What they came up with was claims that the government was going to be, you know, looking at every transaction, you know, they, you know, everything that you do, you know, you're going to spend anything, and it's going to, it's gonna be reported to the IRS, which, of course, was never the proposal, it was not the case, and was not necessary. But they did create that fear factor, and they were relentless in doing it. And I think that was a, you know, that's really what, what carried the day, ultimately, because you couldn't, you know, you couldn't really, I guess, you could some people say the administration could have been more effective and how they defended it. There were details about the proposal that, you know, probably made it worse, but, frankly, I don't think that was it. I mean, you know, pretty hard if you have a lot of not only lobbyists, but then going to their customers and saying, the IRS is going to look at every every dollar you spent and, you know, and and track you every every minute, which was so, so, so completely false. They just couldn't, they just couldn't overcome that.
HELTMAN: But there are other reasons besides political expedience for banks to oppose the measure, and the biggest one is that it would impose some level of additional compliance cost for banks — cost that some banks, particularly smaller ones, are loath to pay for no additional benefit.
MERSKI: It'd be tremendously expensive, because this is something that banks don't already do. It's a new type of reporting on virtually every account. Even if you didn't have to record on a particular account, you'd still have to run the numbers on that account to see if you had to report or not. So you're talking about additional manpower, additional employees, new software, new hardware, new programming, all the privacy notices that banks do would have to be rewritten and resent to all the customers because now you're doing something additional with their data. And I think even a bigger cost is that people would, would take their money out of the banks, even with the threat of this proposal, people were already taking their money deposits out of banks, because of the fear [that] the IRS would be snooping on them and profiling them. So you'd be you know, really hurting the underbanked and unbanked breaking that banking relationship, which is probably the worst cost of all this type of proposal.
HELTMAN: As we said, this idea came out of the Treasury’s green book, and initially it was considered for inclusion in the bipartisan infrastructure
BOLTANSKY: I'm still bullish that they will get package done. I can't tell you when exactly. Senator Schumer, who is the top Democrat in the Senate continues to say that his goal is to have this passed by Christmas. That's a bit tough for me to digest. I think that there are a lot of other issues that will push that timeline into next year, not the least of which is the fact that not all 50 Democrats are in agreement yet. We're still watching for what Joe Manchin, the senator from West Virginia is going to agree to ultimately, but I am still bullish if they get something done. My bet is it's gonna have to take until early January, probably that January 15 Child Tax Credit deadline is going to be the motivating factor. So let's agree that they get something done. It's going to be in the $1-1.5 trillion range is my bet, they'll have to slim it down for Senator Manchin and because of some of the broader inflation concerns within that. My bet, John, is that the IRS bank reporting proposal is not included. But we do have some additional funds for IRS compliance generally. My message to anyone who's listening to this is just to be cognizant of the fact that just because the IRS reporting proposal is not likely to be in this build back better package, it doesn't mean it's dead. These types of proposals don't die, they just hibernate. And so it's important to stay focused on this issue and be prepared for it to resurface again at a later date.
BALLENTINE: I tell you, bad ideas never die in this town. And certainly, this one will likely live on for quite some time. And we certainly, one of the concerns that we had at the start of this process was not just the mystery around what this information would be used for, and how banks would go about collecting it. But also the fact that it was being used and tossed around as they pay-for, so to speak. So the substance you have on one side, and then oh, by the way, it's going to raise a certain amount of money or potentially raise a certain amount of money, because it's been real, really no real analysis done on this outside of the administration. We are hearing through media reports that there may be a senator that is interested in perhaps having a narrower approach to this, we've not seen any language on this, which is another thing, John, is that we've never seen any legislative language on this, which is generally what we react to. But we're hearing that it may still be in the loop. But we also know that there are senators on both sides of the aisle that have serious concerns about raising this issue, again, because there's just simply a lack of information and lack of detail as to how this would work.
HELTMAN: And as Senators attempt to assuage those concerns to get this in the Senate version of the Build Back Better bill, the tools at their disposal are essentially expanding the realm of accounts that would be exempt from this requirement. But ironically, the more complex that threshold becomes, the higher the compliance costs become.
PEDERSEN: The banking lobby success in this fight is pretty much contingent on them absolutely killing it. There can be no survivor. There can be no proposal that is a much narrower approach like the ones that Senators right now — Democratic senators in Congress — are trying to rustle up the votes to make happen, right, every step that this proposal takes to be narrowed, while it might have ... very well might have a positive effect on tax compliance in this country, every little thing that the government's like, “We will exclude federal benefits from the calculation. We'll exclude wages from the calculation.” That will all make it so much harder, banks will say, to actually execute, right? Because like, just from like, right now, like banks don't have particular good ways to determine like, what kind of income is coming in if it's all coming from the same payroll provider? Right? Or, or from a brokerage? Right? There's, they're those systems don't exist right now. They could exist. But but the, you're talking about orders of magnitude of compliance cost as the thing gets more and more narrow.
HELTMAN: It’s also worth noting that this isn’t the only aspect of the administration’s approach to raising revenue through closing the
MERSKI: The IRS has a job to do. People should pay the taxes that they owe. The IRS needs resources to do that. The ICBA supports the IRS having the appropriate resources to do their job to collect taxes that are owed. But we do oppose breaking the relationship between customers and their bank.
BALLENTINE: There's no one in the banking industry that believes that anyone that is that has to pay taxes should not be paying their share of what they are supposed to pay and reporting information accurately. That's full stop where the banking industry is on that issue. What our concern is, and what our concern will remain is the broad net that this is attempting to cast on millions and millions of taxpayers around the country.
HELTMAN: And the IRS is not without the power to acquire precisely the kind of information that this reporting provision would give them preemptively — they can audit people, and in an audit the IRS can get whatever they want from a bank or any other financial services provider. But they would have to go get it, and that would make those audits far less efficient.
ROSSOTTI: What they won't have is they won't have as reliable a way of deciding where the missing income is. Because don't forget, not everybody, most people are, you know, you know, even even within the business segment, let's say there's, there's, there's most people are reporting or reporting accurately, but some people are not. So in the absence of information like this, you will obviously with the money be able to do more auditing, but it's just not going to be as efficient, and as effective. And what what it will be, and this was one of the points we made, you know, but it didn't carry the day is that there's already a big problem because of lack of information that the IRS ends up doing a lot of what are called no-change audits, meaning audits that really didn't need to be done in the first place. They felt like they did when they started, but because of the lack of information, once they got in, they went through the whole process, it turns out, well, I didn't need to do that. And that's, that's really an inefficient process, and a very, you know, unhappy process for everybody. You hear, as a former Commissioner, I hear people telling these stories they came in, they ordered me it turned out, there was nothing there, you know, you still have the burden. So what you're going to have is you're going to have more inefficient auditing, you know, which is not good for the taxpayer, and really, for the bank's customers. And so, you know, you have to you have to use what information you have. I mean, it's common sense, right? If I know exactly where where the problem is, then I can go directly to it, if I have to sort of guess, you know, because I don't, then I guess, but I mean, it's an educated guess they don't just do it at random, but, but it's not going to be as effective.
HELTMAN: And a beefed up IRS budget doesn’t necessarily mean that what we’ll get is …
AMERICAN ACTION NETWORK AD: … an army of IRS agents.
PEDERSEN: The IRS needs money, to not only, like, hire more people — not just hire, they need to train people, for one. Like, tax auditors don't grow on trees. But they also need to overhaul huge swathes of the technology that they're using right now. It is think that people joke about his like, 60s-70s-80s era technology, phone banks and the like. And you know, they're just — there are elements in the private sphere that are so far ahead of what the IRS is capable of doing right now. Right? So that's, that's where a lot of money's gonna go to. It's not just personnel, it's not just hiring more people to do more audits.
HELTMAN: Which brings us to sort of the meta problem behind this fight, which is that we have a somewhat ridiculous tax system in the United States.
"I have no idea, just tell me."
"Nope, you got to add it up."
HELTMAN: This fight over this aspect of tax reporting is just one inefficiency in a sea of inefficiencies in the U.S. tax code — and that’s not just my opinion, it’s something that has bipartisan agreement and has had for quite some time. Former Democratic Senate Finance Committee chairman Max Baucus and Republican House Ways and Means Committee chairman Dave Camp
BALLENTINE: I'm sure every treasury secretary from the beginning of the Treasury Department up until now and has said that they would like to streamline the tax process for everyday consumers. And certainly that is a worthwhile goal. Piecemealing it searching, throwing darts at in an attempt to find income, is not the way to do it. And this proposal was certainly cast one of the broadest nets you'll ever see, in an attempt to try to find anything that John has reported and may not have reported correctly. And that's not the way to do it. So certainly, I don't think this idea is going to go away. There may be ways for them to try to narrow it, we would hope that it's not for purposes of just gathering income, but gathering information, and we would hope that multitude of partners that will be involved in this, the banking industry included, will be brought to the table.
ROSSOTTI: There is a complicated tax system, and there's a whole set of things that go with that. And that's mostly, you know, more sophisticated businesses, large businesses. I mean, most of the tax gap is not large corporations or even very large businesses. That's not what the tax gap is. If somebody pays zero tax, but that was because they figured out a whole set of clever … that's not part of the tax gap. That's not … but you know, when you see these stories about such-and-such a business, you know, paid zero taxes and everything like that. That's not part of the tax gap at all. That's a different problem. Okay, what we're talking about is just very straight. You know, it's like, you just didn't count all your receipts, where you took deductions that just weren't even part of, you know, you were just charging your, your, your personal expenses to your business or something like that, but not not sophisticated strategies. That that is a problem, the sophisticated strategies and ... but but but that's not part of this problem. So you have more than one problem in the tax system.
BOLTANSKY: I think we would all benefit if we had a simpler tax code, the broaden the base and remove the exemptions that that, at this point, largely define our tax system, right? I think that that would definitionally be positive for both tax payers and the federal government. But the Frankenstein's monster, that is our tax code isn't going to get simplified anytime soon. It wasn't simplified by the Trump tax bill, it won't be simplified by the Biden social infrastructure bill that includes taxes. And so I think it's, it's more so just trying to live in the world that that is, right. And so Treasury sees that there is roughly $600 billion in income taxes each year that are owed, that go on collected, and this is a effort to get after those dollars. It would be great if we had a more holistic solution to actually streamline our tax code and to make it simpler to to clear what's owed and actually collect what's owed. But that's not the conversation that's being had right now.