Background
Earlier this year, the Administration and the Treasury Department released a plan in the Fiscal Year (FY) 2022 budget proposal to help close the tax gap and finance an increase in government spending. According to the initial proposal, financial institutions, including credit unions, would be required to file annual information returns to the IRS on the aggregate inflows and outflows of all business and personal accounts totaling over $10,000 in a given year.
While initially promoted as a way to close the tax gap by targeting wealthy tax evaders, the proposal's scope would include almost every American with an account at a financial institution. The goal of closing the tax gap is laudable, but there are many questions about the effectiveness of this provision. The proposal also raises grave privacy concerns for account holders at all financial institutions, as well as real data security concerns at the IRS which, if this were enacted, would house the largest database of financial transactions in the world.
This intrusive reporting requirement, and the data security and privacy risks it entails, could help drive Americans out of the financial system and deter others from opening accounts. According to the FDIC's research, more than one-third of unbanked Americans cite distrust of financial institutions as a reason for not having an account, and requiring institutions to report more of their financial activity to the IRS would likely not help bring them into the system. Credit unions need to be able to assure members and prospective members alike that the financial services they provide are secure and that individuals' financial data and privacy will not be put at risk by the IRS.
Additionally, instituting these requirements would require credit unions and other financial institutions to completely revamp and overhaul their internal reporting structures, which would be cumbersome and costly even without future expansions of the reporting regime. Modifications to this proposal, such as increasing the threshold or exempting certain activities, do not alleviate these concerns. An increase in the reporting threshold would still require credit unions to assess all accounts for potential applicability, and adding exemptions for some transactions, such as paycheck deposits and rent or mortgage payments, would only increase the burden on credit unions as they would be required to identify and exclude those activities before aggregating the remaining annual flows.
Credit unions already report a robust amount of information to the government on accounts. There has not been a detailed cost-benefit analysis to assess the impacts of this proposal. It is unclear if the collection of more data, rather than the more effective use of current data and increasing staff levels to expedite audits of suspicious returns, would better increase tax compliance. Additionally, protecting account holder data and privacy-related concerns should be top of mind for lawmakers as these new requirements would provide the IRS with more of Americans’ financial data as the agency faces serious challenges in combating identity theft and securing tax information.
For additional background information, access NAFCU's issue brief below.