Does the IRS really want to spy on your bank account? The latest tax fight explained

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The Internal Revenue Service (IRS) logo is seen displayed on a smartphone in this photo illustration. A battle over taxes continues to brew as the IRS is seeking to obtain more bank account information, a move strongly opposed by Republicans and the lenders themselves.

Rafael Henrique/SOPA Images/LightRocket via Gett

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Rafael Henrique/SOPA Images/LightRocket via Gett

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What is the Biden administration proposing?

The administration wants to give the IRS more tools to help spot people who might be cheating on their taxes. That could also help deter tax evasion — just as drivers are less likely to speed when they know there’s a police officer around the corner with a radar gun.

The Biden administration wants to improve the tax collector’s financial radar, by requiring banks and other institutions to tell the IRS how much money flows in and out of individual accounts each year.

Despite Republican accusations that the IRS wants to spy on taxpayers, it’s important to note that banks would not report individual transactions — just an annual total of deposits and withdrawals.

Initially, the proposal would have applied to any account with at least $600 in total annual cash flows, but that’s now been narrowed in response to opposition from Republicans and banks.

Under the revised proposal, banks would only have to report on accounts with at least $10,000 in annual deposits or withdrawals, not counting deposits from paychecks or government benefits.

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Signage outside the IRS headquarters in Washington, D.C., is shown on March 19. The IRS’ plan on bank accounts would require lenders to report the annual total of deposits and withdrawals, not individual transactions.

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How would the IRS use the bank information?

The IRS could look for discrepancies between a taxpayers’ total bank deposits and withdrawals and their reported income. If someone’s bank account grows by a million dollars in a year when their reported income is just $50,000, the IRS might have a few questions.

Deputy Assistant Treasury Secretary Natasha Sarin says bank information would help the IRS to target its auditing resources more effectively. But she stresses there’s no extra paperwork involved for taxpayers.

«From the taxpayer’s perspective, literally nothing is required,» Sarin says. «All that happens from the [honest] taxpayer’s perspective is the lower likelihood of a costly audit, when the IRS is better at figuring out who might not be compliant and figuring out who is.»

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IRS Commissioner Charles Rettig testifies during a Senate Finance Committee hearing June 8 on Capitol Hill in Washington, D.C. Prospects of passing an IRS plan to get more bank information remains uncertain.

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IRS Commissioner Charles Rettig testifies during a Senate Finance Committee hearing June 8 on Capitol Hill in Washington, D.C. Prospects of passing an IRS plan to get more bank information remains uncertain.

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Why are banks opposed to the idea?

Banks argue that providing summary information on millions of accounts would be a costly headache — especially for smaller banks. They also raise the threat that the information might be hacked.

Rob Nichols, president of the American Bankers Association, acknowledges that fighting tax evasion is an important goal for the government, but he insists the proposed reporting requirement is the wrong way to go about it.

«It’s too blunt an instrument,» Nichols says. «It’s very unclear if they can keep it safe and secure. And it’s going after hardworking, average everyday Americans who pay their taxes.»

The strong opposition from banks and Congressional Republicans has put the administration and Democrats on the defensive. Just days ago, they scaled back part of their plans, but they still intend to push them through on Congress. So far, the prospect of passage remains uncertain.