Biden Administration’s Proposed Reporting Requirements Pose High Cost, Privacy Concerns
The proposal would require CUs to overhaul their internal reporting structures for all accounts with a gross flow above $600.
By Dan Berger, | June 16, 2021 at 09:00 AM (This article, published by CU Times, has been provided here in full, for your convenience.)
American policymakers should be aiming to empower our communities and provide fuel to our local economies as our nation continues to recover from the coronavirus pandemic.
Yet, tucked inside President Biden’s proposed 2022 budget are new reporting requirements for credit unions and other financial institutions that could impose significant costs and compliance burdens on those institutions.
Under the proposed reporting requirements, financial institutions would be required to file an annual information return for any and all business and personal accounts based on the inflows and outflows in a given year. While initially reported as a way to target wealthy tax evaders to close the tax gap, the budget proposes that it includes any account with over $600 in activity, meaning almost all Americans would be included.
While the goal of closing the tax gap is laudable and something we all can support, many questions have arisen about the effectiveness of such a move to address the issue.
Instituting these requirements would require credit unions and other financial institutions to completely revamp and overhaul their internal reporting structures for all accounts with a gross flow above $600, which would be cumbersome, costly and potentially increasingly complex if the reporting regime is expanded further.
Aside from these burdens, it is entirely unclear if these novel requirements would move the needle in helping enhance the IRS’ ability to identify those who do not report taxable income and close the tax gap. Before Congress approves such a costly measure, they should, at the very least, conduct a detailed cost-benefit analysis to assess its viability and impact. Financial institutions, such as credit unions, already provide a lot of data to the government on taxable events, including sale and distributions, via, among others, Forms 1099-INT, 1099-DIV, 1099-B 1099-R and 5498. It is unclear if more data, rather than more effective use of current data, would lead to more tax compliance.
Without solid analysis, policymakers could be doing nothing more than creating more work for Washington bureaucrats, creating new burdens for credit unions and hastening the consolidation of the financial services industry due to high compliance costs.
Protection of account holder data and privacy related concerns should be top of mind for lawmakers too as these new requirements would provide the IRS with access to more of American consumers’ financial data. Keep in mind, the IRS has faced serious challenges in combating identity theft and false tax returns filed to claim illegal refunds.
To be fair, there are benefits to the proposal, which would include in these new requirements many fintech and crypto companies that operate on the edges of regulation now, allowing a more even playing field for financial institutions with those companies. But there are also other ways to do this without challenging community institutions with new burdens.
We believe it is important that all taxpayers meet their responsibilities, but burdening credit unions and other financial institutions with new costly reporting requirements is not the answer – especially when the benefits are far from certain.
Instead of creating entirely new reporting systems for credit unions and other financial institutions, policymakers would be better off increasing funding to the IRS to hire staff, facilitating targeted auditing of questionable returns and suspicious foreign transactions, and enhancing their already established systems to better analyze current data. This would be a much more efficient and effective approach to closing the tax gap, while not creating new costs and burdens for credit unions and the millions of hard-working Americans they serve.
NAFCU is committed to working with lawmakers to find an appropriate solution that solves the problem. But for now, the reporting requirements inside President Biden’s 2022 budget proposal raise too many concerns.
Dan Berger is president/CEO of NAFCU in Washington, D.C.