Will Washington turn banks into agents for the IRS?

It has strong support among progressive Democrats like Elizabeth Warren, but more centrist Dems in the House and Senate need to hear from their community bankers.

Senate Republicans and the White House spent most of June trying to come up with a bipartisan infrastructure bill. An agreement is still a long shot because many progressive Senate Democrats will most likely not vote for a limited bill, making it more difficult to get the necessary 60 votes. The Senate Majority Leader, Charles Schumer, has already started the process for a huge budget reconciliation bill using a mechanism that will only require 50 votes plus the Vice President’s vote.  Schumer wants to include elements of Biden’s $2.25 trillion American Jobs Plan $1.8 trillion American Families Plan.

To pay for all this spending (while still adding to $26 trillion in debt), Biden is proposing increases in corporate taxes, income taxes and taxes on capital gains. The IRS is to receive $80 billion in new appropriations over the next 10 years. Over the last decade, the IRS budget has decreased by 20% leading to a decline in specialized auditors. It is worth noting that, despite budget declines, the IRS has managed to increase gross revenue collections from 2010 to 2019, from $2.34 trillion to $3.56 trillion.

A particularly troublesome proposal is to require banks and other intermediaries to do annual reports on total account outflows and inflows for all of their customers. According to the Treasury Department, “This requirement would apply to all business and personal accounts from financial institutions, including bank loans and investment accounts, with the exception of below a low de minimis gross threshold of $600.”  Essentially, this is big government doing big data collection. Treasury says that “importantly, there are no added requirements for taxpayers.”  No mention is made of the compliance costs that banks will have to incur. The IRS estimates that this will generate an additional $600 billion and will rise to over $7 trillion over the next decade.

The fight is not over regarding this proposal to gang-press banks into the tax enforcement effort. It has momentum because it does not raise taxes on a particular industry (although this amounts to a compliance tax for banks.) It needs to be challenged in the legislative process. It has strong support among progressive Democrats like Elizabeth Warren, but more centrist Dems in the House and Senate need to hear from their community bankers. The crucial votes will take place this fall.

If this is part of the final bill and is signed by the President, the provision could still be subject to constitutional challenges in the federal courts. Customers have a reasonable expectation of privacy in their financial records. The Fourth Amendment protects against such broad government searches. The First Amendment could be used as a challenge because it compels speech by banks. This could be described as an impermissible delegation of congressional authority to the IRS. The new majorities on the U.S. Supreme Court are more sympathetic to the nondelegation doctrine.  (The constitutionality of the CFPB is still subject to challenge because of all the power it received from Congress.) The provision is also subject to challenge as a violation of treaty obligations, including the European privacy law, the GDPR.