Here's when the IRS can check out my bank account

Let’s say I hire a contractor to do a project on my house, and he asks for payment in cash. It would be cheaper than if I wrote a check, and we both know why: Cash leaves less of a paper trail and the contractor might not report it as income. If he doesn’t have to pay income tax on the money, he’ll share some of the savings with me.

This type of gray-market transaction happens all the time, every day. Parents pay babysitters and nannies in cash. Waiters earning tips report a fraction of what they take home as taxable income. People selling used cars slash hundreds or thousands off the agreed price on the bill of sale they submit to the state, so the buyer pays less in sales tax.

The Biden administration wants Congress to give the IRS authority to look in people’s bank accounts as a tool for helping find tax cheats. The premise is solid: Massive tax avoidance robs the Treasury of as much as $280 billion per year, with wealthy evaders dodging the most in taxes. One recent study found the top 1% of earners underreport their income by 21%. Matching bank records with tax filings and other documents the IRS already has would help identify who’s hiding money, and where.

WASHINGTON, DC - JUNE 08: Sen. Rob Portman (R-OH) greets Charles P. Rettig, commissioner of the Internal Revenue Service during a Senate Finance Committee hearing June 8, 2021 on Capitol Hill in Washington, D.C. The committee is hearing testimony on the IRS budget request for 2022. (Photo by Tom Williams-Pool/Getty Images)
Sen. Rob Portman (R-OH) greets Charles P. Rettig, commissioner of the Internal Revenue Service during a Senate Finance Committee hearing June 8, 2021 on Capitol Hill in Washington, D.C. The committee is hearing testimony on the IRS budget request for 2022. (Photo by Tom Williams-Pool/Getty Images)

Reeling in more of the tax revenue evaders already owe might restore some sense of fairness to a system many think is rigged in favor of the wealthy. Democrats with slight majorities in both houses of Congress also need new revenue to pay for a broad package of social-welfare and green-energy programs they want to pass by the end of the year. President Biden says an extra $80 billion in enforcement funding over a decade could help the IRS collect an extra $700 billion in taxes Americans already owe. That would be 900% return on investment. If the return is only one-third that, it would still be a bargain.

In practice, however, the prospect of more IRS snooping into Americans’ finances is an off-the-shelf outrage generator. Anti-government sentiment is near historic highs. The spread of disinformation is too. Toss in a little demagoguery, and social-media trolls will have half the country thinking the IRS is stealing money from their bank accounts. The Treasury Department says IRS bank reviews would target the wealthy, not lower- or middle-income families. But the scaremongering practically whips itself up.

The original plan was for the IRS to monitor accounts with balances of more than $600, which is meant to filter out inactive accounts or those held by kids. That threshold is way too low. Democrats drafting legislation are considering raising the cutoff to $10,000, but $100,000 or even $1 million might be a better limit. Any proposal to monitor bank accounts, in this climate, would need ironclad assurances that ordinary people won’t end up as collateral damage, even if they do cheat in small ways by paying household workers in cash.

1040 form
President Biden wants to give the IRS more information about money moving in and out of people's bank accounts. (Getty Images)

Distortion of tax enforcement

The IRS already has a strong incentive to focus limited auditing power on the wealthy, for one obvious reason: That’s where the money is. But the IRS sometimes follows the path of least resistance rather than the path of highest return. Audit rates for recipients of the earned-income tax credit—low-income Americans, by definition—get audited at higher rates than any income group except those earning more than $1 million, according to ProPublica.

That’s not necessarily because the IRS is cruel. Claiming the EITC can be complicated and filers often make mistakes that IRS computers pick up, triggering an audit or a delayed tax refund. Still, it’s a distortion of the tax enforcement system that misdirects very scarce IRS resources and contributes to the IRS’s lousy reputation. The same thing could happen with bank monitoring if it turns out to be easy to spot cash babysitter payments, say, and go after middle-income workers for a couple of thousand of dollars here and there. The wealthy, meanwhile, would still have their complex tax-evading schemes, and in many cases better lawyers and accountants than the IRS can muster.

As a worker earning almost all of my income from labor, with no capital-gains tax shelters, I want the IRS to collect every penny of unpaid tax evaders owe. If monitoring my bank account will somehow shrink the massive tax gap—the $280 billion per year tax cheats owe but don’t pay—I’m all for it. The IRS already knows how much money I make and where it comes from. Monitoring my bank account would give them a little extra info on where I spend my money. Since I have nothing to, um, hide, I'd never even expect to hear from the IRS, no matter how deep they went into my account. 

Bunch of ATMs. A Citibank bank branch at 6th Avenue in New York City, USA as seen during the night with ATM and illuminated logo. Citibank financial institution is the consumer division of financial services multinational Citigroup, founded in 1812 as City Bank of New York.  NY, United States of America. (Photo by Nicolas Economou/NurPhoto via Getty Images)
A Citibank bank branch at 6th Avenue in New York City. (Photo by Nicolas Economou/NurPhoto via Getty Images)

What's the threshold?

But skepticism is appropriate, and if Democrats pass legislation allowing the IRS to monitor anybody’s bank account, there should be a foolproof way for Americans to know ordinary people are off-limits. In addition to a high threshold for bank balances, there could be an income threshold as well—and it should be higher than the $400,000 limit Biden uses as this hands-off boundary for tax increases. Many two-income families earn more than $400,000 but live fairly ordinary lives, carpooling kids to school and sports and struggling to find a little downtime. They don’t need the IRS hassling them for the Beltway equivalent of cushion change. A $1 million minimum income threshold feels about right, for starters.

In fact, how about a demonstration targeting only the richest families in America? The IRS knows who they are, and Congress could give the IRS a down payment on that $80 billion to troll around in the bank accounts of Jeff Bezos and Elon Musk and Peter Thiel and find their hidden money. After a couple of years, the IRS could report back, in the aggregate, and let everybody know how much extra tax revenue they were able to snag by matching billionaire bank records with other data. Then Congress could give them a little more money to go down the chain from billionaires to multimillionaires, and so on.

So sure. When the IRS shows that monitoring bank accounts will net enough revenue from rich tax evaders to be worth the trouble, I’ll gladly let them into my account. There’s nothing to see there anyway, but it would be nice to have some assurance that they won’t waste their time with people like me.

Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.

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