What Is the IRS Financial Surveillance Act?
An overview of a proposed tax reporting rule that sparked a debate over the balance between government tax enforcement and personal financial privacy.
The term “IRS Financial Surveillance Act” does not refer to an enacted law but is a name given by critics to a tax reporting proposal. This proposal, part of President Biden’s “Build Back Better” plan, was designed to give the Internal Revenue Service (IRS) more visibility into financial accounts to help identify tax evasion. The concept generated debate, with proponents highlighting its potential to close the “tax gap” while opponents raised privacy and data security alarms.
The proposal aimed to create a new information reporting requirement for financial institutions like banks and credit unions. The goal was to equip the agency with information to better scrutinize financial activities and ensure taxpayers were accurately reporting their income. This initiative was met with bills introduced in Congress seeking to prevent such reporting requirements from being implemented.
The Core Reporting Proposal
The initial version of the proposal called for financial institutions to report annually on any account with total deposits or withdrawals of $600 or more during the year. This low threshold meant that the accounts of most Americans would have been subject to this new reporting, sparking widespread opposition.
In response to the backlash, the proposal was revised. The reporting threshold was raised to $10,000 of activity per year. A more important change was the exclusion of certain income from this calculation. Under the revised plan, inflows from wages paid through payroll systems and benefits from federal programs, such as Social Security, would be disregarded when determining if an account met the $10,000 trigger.
The proposal did not call for the reporting of individual transactions. Instead, it required reporting total annual inflows and outflows for qualifying accounts. For example, a bank would report that an account had $25,000 in total deposits and $23,000 in total withdrawals for the year, not that the account holder made specific purchases.
This aggregate data was intended to give the IRS a tool to identify income that might not be reported otherwise. The focus was on business-related income or other earnings that do not have third-party verification, unlike wages on a Form W-2 or investment income on a Form 1099. The information would serve as a new data point for the IRS to use in its audit selection process.
Stated Purpose and Rationale
The primary justification for this proposal was to help address the “tax gap,” which is the difference between taxes legally owed and the amount actually collected. Proponents argued that providing the IRS with more information would be an effective way to shrink this gap, specifically by identifying underreported income from sources that lack third-party reporting, such as from small businesses or gig economy work. The administration contended the data would allow the IRS to better direct its audit resources toward higher-income individuals and away from compliant, wage-earning taxpayers.
Key Criticisms and Privacy Concerns
Opponents of the proposal raised concerns about the privacy implications for ordinary Americans. The plan would have resulted in the government collecting financial data on millions of individuals not suspected of any wrongdoing, representing an expansion of government surveillance into the financial lives of citizens.
Data security was another point of contention. The creation of a centralized database containing the annual financial flows of a vast number of U.S. bank accounts was seen as a high-value target for cybercriminals. Opponents expressed fears that a data breach could expose sensitive financial information, leading to widespread fraud and identity theft.
Financial institutions, particularly smaller community banks and credit unions, also voiced opposition. They argued that implementing the systems to track and report this data would impose a significant administrative and financial burden. These costs could lead to higher banking fees for consumers or cause smaller institutions to merge or close.
Legislative Status and Current Reality
The financial reporting proposal was never enacted into law. It was included as a provision within President Biden’s broader Build Back Better legislative framework. However, due to sustained opposition from the public, the financial services industry, and a bipartisan group of lawmakers, the provision was removed from the bill before any final votes.
As of today, there is no federal requirement for financial institutions to report aggregate inflows and outflows on customer accounts to the IRS in the manner the proposal outlined. The plan was officially dropped and has not been revived in subsequent legislation. Therefore, the “IRS Financial Surveillance Act” is not a law, and the reporting it described is not in effect.