The Proposed IRS Bank Reporting Requirement: Frequently Asked Questions

The Proposed IRS Bank Reporting Requirement: Frequently Asked Questions

INSIGHTi

The Proposed IRS Bank Reporting
Requirement: Frequently Asked Questions
Updated October 20, 2021
A proposal to require financial institutions to report information to the Internal Revenue Service (IRS) on
personal and business accounts has garnered significant publicity and congressional attention. The
proposal is commonly referenced as the “new IRS bank reporting requirement.” This Insight addresses a
number of frequently asked questions about the proposal.
What is the proposal and where did it come from?
The proposal referenced in media reports was originally included in the President’s FY2022 budget
request and is described as being part of a “comprehensive” financial account information reporting
regime. The General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, which
accompanies the President’s budget request, states that
Financial institutions would report data on financial accounts in an information return. The annual
return will report 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. This requirement
would apply to all business and personal accounts from financial institutions, including bank, loan,
and investment accounts, with the exception of accounts below a low de minimis gross flow
threshold of $600 or fair market value of $600.
A recent Treasury Department press release states that the Administration has modified its proposal by
increasing the $600 gross flow threshold to $10,000. Additionally, Treasury’s press release states that
under the modified proposal, wage and salary earnings, as well as government benefits (e.g.,
unemployment compensation) deposited into accounts, would not count toward the $10,000 threshold.
The press release also elaborated on how the proposal would work
Financial institutions and banks will add just two additional numbers to the information that they
already supply to taxpayers and the IRS: the total amount of funds deposited into the account and
the total amount withdrawn over the course of a year. The scope of this information sharing is
extremely limited. Banks will not share with the IRS any information to track individual
transactions under this proposal, and the IRS will have no ability to track individual transactions.
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Is the proposal included in legislation?
The new bank reporting requirement proposal, either in its original or modified form, is not currently a
legislative proposal. Some have suggested that it may be considered as Congress develops modifications
to either the reconciliation bill (H.R. 5376), known as the Build Back Better Act, or the infrastructure bill
(H.R. 3684, as amended and passed by the Senate on August 10, 2021).
The Senate-passed version of H.R. 3684 includes a separate information reporting requirement that would
require an information return to be filed by those facilitating the transfer of cryptocurrency and by
businesses receiving cryptocurrency worth more than $10,000 in a single transaction (for more
information, see CRS In Focus IF11910, Cryptocurrency Transfers and Data Collection).
What is the purpose of information reporting?
There are two general purposes of information reporting. The first is to increase tax compliance and to
reduce money laundering and illicit financial activity. The second is to provide information to taxpayers
to allow them to accurately calculate their tax liability. When an information return is filed, a copy of the
return is sent to the IRS and a copy is sent to the taxpayer. This allows the IRS to double-check the
information reported by a taxpayer. Additionally, the IRS can use the information to flag returns for audit.
At the same time, the copy sent to taxpayers provides them with information that they may need when
completing their tax return. Taxpayers may also be more likely to accurately report their income if they
know the IRS has this information. Information returns typically must be sent to the IRS and taxpayer
early in the calendar year.
What are the current information reporting
requirements?
A significant number of transactions are currently subject to information reporting requirements. The
IRS’s Guide to Information Returns identifies transactions in the following categories: general, education,
health insurance, transfers of stock, and retirement. Financial institutions are currently required to file
information returns for any account for which interest payments or dividends are $10 or more throughout
the year. They are also required to report the amount of mortgage interest paid, student loan interest paid,
amount of canceled debt, distributions from certain retirement accounts, and certain transactions in which
they serve as a payment settlement entity, among others.
Taxpayers are legally required to pay the appropriate tax regardless of whether they receive an
information return. For example, an individual who receives $9 of interest on a savings account is
required to pay tax on that income, even if an information return is not received.
Is the proposal a new tax?
The proposed bank reporting requirement would not be a new tax. Information reporting, as the name
suggests, provides more information to both the IRS and taxpayers. If, however, the additional
information results in taxpayers making additional payments in compliance with existing tax laws,
taxpayers may pay more in taxes.

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What are the trade-offs involved with information
reporting?
Information reporting raises a number of general policy considerations. One concern is the appropriate
balance between government data collection and the rights of individuals. Information reporting may
assist the IRS in fulfilling its statutory obligation to administer the tax code, but it also subjects
individuals and businesses to greater government scrutiny. Another consideration is that increased
information reporting would place an administrative burden on financial institutions required to make
reports. The magnitude of such a burden is not necessarily clear given that financial institutions are
already required to report certain information. At the same time, increased information reporting may
assist individuals in completing their tax returns and more easily complying with the law. With regard to
the proposed bank reporting requirement, it is not clear how knowing one’s financial flows throughout the
year would help in determining taxable income.
How could increased information reporting reduce the
tax gap?
The proposed bank reporting requirement would likely decrease the tax gap by increasing tax collections.
The tax gap is the difference between the aggregate amount of taxes legally owed and the aggregate
amount of taxes collected. The latest IRS estimates suggest that the gross tax gap costs the federal
government $441 billion in lost tax revenue per year. Late payments and enforcement actions reduce this
gap to $381 billion. In an April 13, 2021, Senate Committee on Finance hearing, IRS Commissioner
Charles P. Rettig raised the possibility that the tax gap may now be closer to $1 trillion per year once the
rise in popularity of cryptocurrency, foreign-source income, taxable illegal income, and more recent
estimates regarding high-income taxpayers are accounted for. Some have questioned the accuracy of this
estimate. Still, the IRS’s tax gap estimates clearly demonstrate that income subject to little or no
information reporting is more likely to be underreported for tax purposes than income subject to more
information reporting. About $245 billion (56%) of the gross tax gap is attributable to underreporting of
income on the individual side. Income that is subject to little or no information reporting accounts for
$109 billion (55%) of the $245 billion shortfall. Income subject to substantial reporting and withholding
accounts for just $9 billion (1%) of the shortfall.

Author Information

Mark P. Keightley

Specialist in Economics

Disclaimer

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