Former Director, Center for Capital Market Competitiveness, U.S. Chamber of Commerce
December 21, 2021
Underlining the successful relationship between banks and their customers is a simple yet essential element: trust. Bank customers expect their transactions to be both secure and confidential, and banks honor that trust to garner consumer confidence and grow.
Recently, in the scramble to raise revenues for the so-called “Build Back Better Agenda,” some policymakers in Washington, D.C., have developed a proposal that would violate that trust by requiring banks to monitor accounts on behalf of the IRS.
In a recent poll by Morning Consult and the Independent Community Bankers of America, 67% of voters opposed the initial IRS proposal, while 64% said they do not trust the IRS to monitor financial info. Additionally, 54% said they do not trust the IRS to keep financial data safe.
Though its specific language remains in flux, the broad outlines of the proposal would require banks to report the annual inflows and outflows of customer’s accounts with over $10,000 in transactions. If this sounds extreme, it is. The new reporting regime would sweep up the information of over 87 million Americans with adjusted gross income of less than $400,000 according to an analysis by the Congresses’ Joint Committee on Taxation.
Implementing a new mandatory reporting regime whereby banks must monitor and collect data on their customer’s accounts will hurt not only banks but also the businesses and communities that rely upon their services.
Businesses need policies that incentivize growth and ensure access to capital. Under this proposal, businesses across America could face the increased cost of tax preparation and potentially be subject to needless audits that would unnecessarily divert resources toward tax compliance and away from serving customers and growing their businesses.
Banks themselves would also be burdened by a huge compliance cost. Smaller community banks would be particularly hard hit and would struggle to shoulder the burden, which could accelerate the already rapid consolidation of the industry.
An invasion of privacy on this scale also could increase skepticism of regulated financial institutions by underbanked and unbanked consumers, thereby creating an additional barrier for those that have traditionally limited access to banks or rely on alternative financial services.
For their part, federal agencies are already equipped through existing laws and subpoena authority to ensure proper taxes are collected. Tax collection is the responsibility of the federal government, not financial institutions. This proposal will add nothing to the already abundant tools at the disposal of the IRS and other federal agencies.
The U.S. Chamber has advocated for policies that lead to financial inclusion for the underbanked and unbanked, additional options for investors, and creative techniques to assist businesses in raising capital. An invasion of privacy on this scale could increase skepticism of regulated financial institutions by underbanked and unbanked consumers. It also could prompt privacy fears with current account holders to withdraw deposits and thereby threaten the stability of the banking system.
The proposal already faces bipartisan opposition in Congress, with members of the House and Senate introducing the “Prohibiting IRS Financial Surveillance Act.” The Chamber supports this legislation that would bar the IRS from instituting any new requirements that would force financial institutions to report on the account activity of regular Americans, while not restricting any existing authority for the IRS to collect taxes. It would allow individuals and small businesses to make normal financial transactions in their everyday lives without fear of increased and unnecessary scrutiny from the federal government.
Policymakers should be focused on ensuring the privacy of consumers and access to capital for small businesses, not proposals that will weaken both.
About the authors
Will Gardner is the former director of policy at the U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC). He led CCMC’s portfolios on banking and insurance issues and manages its work with the Financial Stability Oversight Council (FSOC).