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be reportable by financial institutions: the total amount of funds deposited into a bank account and the total amount withdrawn over the course of a year if $10,000 or more in the aggregate.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.
As a tax policy expert with a comprehensive understanding of the intricacies of financial legislation, I'd like to delve into the key concepts and implications surrounding President Biden's Build Back Better plan, specifically H.R. 5376. My expertise in tax policies and legislative processes allows me to provide an in-depth analysis of the content and controversies surrounding this proposed legislation.
Firstly, the Build Back Better plan, with a proposed budget of $1.75 trillion, is currently facing challenges in gaining support from a majority of Democratic members in Congress. Unlike the Infrastructure Investment and Jobs Act, which received bipartisan approval, the Build Back Better plan lacks Republican support, given its reliance on tax increases and new compliance measures to fund the proposed initiatives.
One particularly contentious provision within the bill is the bank account reporting requirement. Originally set at a threshold of $600, the reporting limit has been raised to $10,000. This provision mandates that financial institutions report the total inflows and outflows from a taxpayer's accounts on a yearly basis, and it is set to become effective for the tax year 2023.
To address the controversy and what the Treasury Department calls "widespread mischaracterization" of the plan, the department has released a fact sheet in advance of the bill's passage. This fact sheet outlines key points about the reporting requirement, shedding light on how it works and what is exempt from reporting.
According to the Treasury Department's explanation:
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Financial institutions will report two data points: the total amount of funds deposited and the total amount withdrawn over the year if $10,000 or more in the aggregate.
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Banks have the option to round the figures they report to the nearest $1,000 instead of providing exact figures.
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Noteworthy exemptions include wages, salaries, and federal benefits, with no requirement for reporting individual transactions.
To illustrate further, examples are provided:
- Taxpayer A, with $56,000 in direct deposits from salary and outflows under $56,000, is not subject to reporting.
- Taxpayer B, reporting $10,000 of income but with $10 million in bank account flows, is subject to reporting.
Senate Finance Committee Chairman Ron Wyden clarified that there will be no additional reporting if a taxpayer does not have $10,000 above their paycheck, Social Security income, or other federal benefits coming in or going out. Additionally, spending a significant amount from savings for a major purchase will not trigger additional reporting if the incoming money does not exceed wages plus $10,000.
The Treasury justifies this provision by emphasizing its "extremely limited" scope, aligning with existing reporting requirements for interest over $10 and the reporting of $10,000 cash transactions. It assures that the provision will not increase taxes but rather facilitate the collection of taxes owed if income is properly reported. The focus will be on addressing high-income evasion, and audit rates are not expected to rise for taxpayers earning under $400,000 a year.
However, opposition to the bank reporting requirement comes from the American Bankers Association (ABA), which considers it "bad tax policy." The ABA raises concerns about the privacy of personal financial information, implementation costs, and the impact on average Americans. Financial institutions will be required to develop technology and processes for identifying accounts, reporting to the IRS and customers, and educating both customers and bank staff on the implications of the information.
In conclusion, the reporting provision is set to take effect in 2023, with reporting to be done on Form 1099-INT, which is already used to report interest. The fate of H.R. 5376 was uncertain at the time of the article, highlighting the ongoing challenges in passing this comprehensive legislative package.
