Center for American Progress

Bank Tax Reporting Is a Critical Component of Biden’s Build Back Better Agenda

Bank Tax Reporting Is a Critical Component of Biden’s Build Back Better Agenda

Requiring more information from financial institutions will help catch and deter tax cheats while reducing audits of honest taxpayers.

A sign outside the Internal Revenue Service (IRS) Building, January 1997. (Getty/James Leynse)
A sign outside the Internal Revenue Service (IRS) Building, January 1997. (Getty/James Leynse)

$163 billion

Amount of unpaid taxes the richest 1 percent are responsible for each year

The United States will lose an estimated $7 trillion over the next decade from people and corporations not paying the taxes they owe. That is twice the $3.5 trillion of investments that Congress is now considering in the budget reconciliation bill.

The richest 1 percent of taxpayers alone are responsible for an estimated $163 billion in unpaid taxes each year. Yet, due to Internal Revenue Service (IRS) budget cuts, the IRS has lost thousands of experienced enforcement personnel capable of thoroughly examining complex tax returns. Audit rates of high-income Americans and the largest corporations have plummeted, draining revenue and resulting in an increased share of examinations focused on recipients of the earned income tax credit (EITC), who are much more inexpensive for the IRS to audit. The status quo benefits wealthy tax cheats to the detriment of ordinary Americans. It also reinforces economic inequality, including the stark income and wealth inequities by race.

President Joe Biden’s plan to improve tax enforcement is aimed squarely at fixing the broken and unjust status quo. The Biden plan has two main components: One is to fund IRS enforcement of high-income individuals and corporations, modern technology, and better taxpayer service; the second is to give the IRS greater visibility into opaque forms of income by requiring banks and other financial institutions to report very basic information about accounts.

This column explains how the bank information reporting proposal will:

  • Alleviate the United States’ two-tiered system of tax compliance
  • Preserve taxpayers’ privacy
  • Enhance the IRS’ ability to detect indications of cheating
  • Result in fewer audits for honest taxpayers and small businesses
  • Raise revenue for essential investments

The House Ways and Means Committee will begin to consider the tax provisions of the Build Back Better legislation starting tomorrow. Currently, the bank reporting proposal is not included in the committee’s draft legislation because members of Congress continue to work out details. Given its critical importance, Congress must incorporate the bank reporting proposal into the legislation as it progresses.

The current two-tiered system of tax enforcement favors the wealthy over workers

Workers’ wages and salaries are subject to third-party information reporting: Your employer is required to send matching copies of the W-2 to you and to the government showing exactly what you were paid. By contrast, the income received by businesses such as partnerships, S-corporations, and proprietorships—which flows heavily to the top end of the income distribution—is often not reported to the IRS by third parties. Consequently, taxpayers often do not report it on their tax returns.

The result is a two-tiered tax system where virtually all workers’ wages are properly reported but business owners misreport income at shockingly high rates. (see Figure 1) The Biden proposal is aimed at leveling this two-tiered system so that ordinary Americans have greater confidence that others are not cheating while they pay full freight.

The Biden tax enforcement plan advances racial equity by addressing the unjust status quo

Recent trends in tax enforcement have worsened racial inequities. By slashing the IRS’ budget, Congress has eviscerated the agency’s ability to go up against wealthy individuals, who are disproportionately white, and large corporations, whose executives and shareholders are disproportionately white. As tax scholar Dorothy Brown writes, “[R]ich white Americans tend to get tax rules designed for their benefit. Quashing the funding that could have helped the IRS more aggressively pursue elite tax fraud is yet another example.” Without the resources to pursue “elite” tax fraud, the IRS has focused an increased share of its audits on low-wage workers claiming the EITC, who are disproportionately people of color.

President Biden’s plan is aimed squarely at fixing this unjust status quo. It equips the IRS to adequately examine the complex returns of wealthy individuals and corporations while ensuring that audit rates for people earning under $400,000 will not go up. As the Center for American Progress wrote in June:

These shifts in priorities would mean a smaller share of overall audits would be of low-income filers, who are disproportionately filers of color, and refocus the agency’s efforts on high income individuals—who are disproportionately white—as well as corporations.

As a coalition of organizations dedicated to racial equity wrote in a letter to Congress today:

The budget reconciliation package would provide more resources to the IRS to increase enforcement against wealthy tax cheats who evade paying what they owe, a group that’s mostly white … Giving the IRS more resources to pursue wealthy tax cheats and requiring financial institutions to help the IRS in its efforts to identify likely and actual evasion would make tax enforcement more equitable and could raise $700 billion.

As these organizations emphasize, Biden’s revenue proposals support investments that advance racial equity by narrowing racial income and wealth gaps and fund long-overdue investments in communities of color.

President Biden’s proposal requires banks to report very basic information about financial accounts and does not compromise privacy

The administration’s proposal would improve third-party information reporting so the IRS can better spot indications of tax cheating. Specifically, it would require financial institutions to require very basic information about accounts. Currently, financial institutions must file Form 1099-INTs for all customers that have more than $10 of interest income. The administration’s proposal requires them to report two additional topline pieces of information regarding customers’ accounts—gross annual inflow into accounts and gross annual outflow. Small accounts would be excepted. Congress is currently considering where to set thresholds for exempting accounts. It will need to weigh the desire to exempt truly de minimis accounts with the danger in setting too high an exemption threshold, allowing cheaters to fly under the radar using multiple accounts.

It is important to understand what the proposal does and what it does not do. The only numbers that financial institutions would report are total amounts of money that flowed into a bank account during the prior year and total amounts of money that flowed out. It does not require reporting of individual transactions.

Unfortunately, bank lobbies are spreading false claims about this proposal. One example is a scripted message to Congress claiming that the proposal would require reporting of “all transactions of all business and personal accounts worth more than $600.” That is flatly false. Banks would be required to provide just aggregate numbers to the IRS after each year—gross inflow and gross outflow—and not individualized transaction information.

Elsewhere, the bank lobby claims the proposal would enable “monitoring” of bank accounts, as if the IRS would be seeing into people’s bank accounts in real time. That claim is also highly deceptive. Only the prior year’s total inflow and total outflow would be reported on annual forms. No one would say that the IRS “monitors” you on your job because it receives a W-2 from your employer with your total wages every January.

The bank lobby is also telling members of Congress that privacy fears would lead more consumers to remain “unbanked.” However, if anything, it is their unfounded claims that are seeking to whip up such fears in the first place. Moreover, the Ways and Means Committee’s draft legislation includes other measures that will encourage more people to enter the formal banking system including the extension of the fully refundable Child Tax Credit, which can be direct deposited into accounts.

The IRS already has the authority to demand and summons any relevant information—including bank statements—if it selects a person for audit. As explained below, the Biden plan would make it less likely for ordinary, honest taxpayers to be selected for audit and then potentially have to provide such information to the IRS.

The Biden proposal protects privacy in additional ways. Additional funding would go to enhancing data security. Even at present, the IRS’ data security is already much better than the financial industry, with only very rare and limited breaches compared to the exponentially bigger data breaches from financial institutions. Second, the reporting of information flows only from financial institutions to the IRS and not in the other direction, as some earlier proposals had called for.

Taxpayers do not have to anything. The only requirement is on financial institutions to provide basic information they already have on hand.

The bank reporting improves the IRS’ ability to spot tax evasion

Currently, much business income is entirely invisible to the IRS. Requiring financial institutions to provide basic information on accounts would greatly help the agency spot indications of cheating. To illustrate the value of the proposal, consider the following situations:

  • A partnership has millions of dollars flowing into a bank account, but the IRS receives no partnership tax return.
  • A person’s business bank account has large amounts of money flowing in, but they report only modest gross income on Schedule C.
  • A business owner reports large levels of deductions, but their bank account shows minimal outflows.

These are simplified examples meant to illustrate how the proposal works at its most basic level. But such brazen fraud does occur, and the bank reporting proposal would make it much easier for the IRS to spot. In more complex cases, bank flows will be one factor in prioritizing audit selection. High-income taxpayers or entities with potential discrepancies between bank flows and reported income will be more likely to be audited. As the IRS’ technology improves, it will become even better at spotting suspicious patterns and new evasion strategies.

Crucially, under the administration’s proposal, audits of taxpayers earning under $400,000 will not increase. This means that giving the IRS information enabling it to prioritize audits in a smarter way will result in honest taxpayers—including small businesses—being audited at a lower rate.

The largest impact of the administration’s proposal will be in deterring tax cheating in the first place.

Better targeted audits will result in more revenue collected from tax cheats. And the largest impact of the administration’s proposal will be in deterring tax cheating in the first place. Cheats will think twice if they know that streams of income will not be entirely invisible to the IRS.

Revenue from tax cheats supports Build Back Better’s critical investments

The bank reporting proposal and the broader tax compliance proposal will raise substantial revenue from tax cheats to support the investments in the Build Back Better agenda—investments in clean energy, health care, child care, education, paid leave, and many other critical areas. The overall plan includes the IRS funding as well as a key bipartisan proposal to improve oversight of paid tax preparers. Unscrupulous and incompetent preparers can get their unwitting clients in trouble with the IRS by botching their tax returns. They also may fail to claim valid tax credits or deductions on clients’ behalf. The National Taxpayer Advocate has urged Congress for years to authorize paid preparer regulation to establish minimum competency standards—and it is time for Congress to act.


The Biden administration’s bank reporting proposal is a critical element of the Build Back Better agenda. It gives the IRS some visibility into opaque forms of income that disproportionately accrue to high-income individuals. Despite fearmongering from bank lobbies, the proposal protects taxpayers’ privacy while simply requiring banks to provide basic, aggregated information about flows. That enables the IRS to select audits in a more efficient and equitable way so that the vast majority of taxpayers will be less likely to be audited. And by deterring and helping catch tax cheats, the proposal raises substantial revenue for the Build Back Better agenda, which provides critical investments to increase economic opportunities for American families and communities.

Seth Hanlon is a senior fellow on the Economic Policy team at American Progress. Galen Hendricks is a former research associate at the Center.

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Seth Hanlon

Former Acting Vice President, Economy

Galen Hendricks

Research Associate

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