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IRS could get more info on people's bank accounts if new proposal passes: What you need to know

"I personally resent the IRS poking around in there."

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The Internal Revenue Service (IRS) headquarters in Washington, D.C.
Janhvi Bhojwani | CNBC

Earlier this year, IRS commissioner Chuck Rettig told the Senate Finance Committee that the nation's current tax gap — the difference between taxes owed and taxes paid — is approximately $1 trillion. In an effort to close that gap, the Biden administration has proposed giving the IRS more access to Americans' bank account information.

The proposal, which is part of a $3.5 trillion spending bill that is currently being debated by the House Ways and Means Committee, would require banks and other financial institutions to report how much money goes in and out of bank accounts each year with a balance of as little as $600, according to Treasury Department documents.

Some experts are skeptical that the policy would be an efficient use of resources. "I think that's actually going to provide the IRS with a lot of useless information, because it's not even close to taxable income," says Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center at the Urban Institute. "Like, if you looked at my bank account and salaries being deposited, and checks for my kid's education, things of that sort, none of it is obvious on its face of what it's being used for. And I personally resent the IRS poking around in there."

Treasury Secretary Janet Yellen defended the proposal on CNBC's "Squawk Box" on Tuesday, explaining that the point of the oversight would help the tax agency get more information about wealthy households that may not be paying their fair share because they have "opaque" or "hidden" income sources. "It would be a simple thing for banks and other payment providers to provide along with the other information they're already providing," Yellen said.

Here's what you need to know about the new proposal.

Banks, critics raise privacy concerns

Critics of the proposal call it an invasion of American privacy. "We want to stop this in its tracks. I want to be able to tell cowboys in Wyoming that if they make a payment on their pickup truck or buy a saddle for their horse, they're not going to have an IRS agent along for the ride," Senator John Barrasso, R-WY, told reporters Tuesday.

Financial institutions sounded alarms, too: "We understand the purpose of the goal here: It's to make sure that everybody pays the right amount of taxes. But what you're asking is for low- and moderate-income people to turn over their financial data to try and catch millionaires and billionaires who are not paying their taxes. That's just the wrong-headed approach," Richard Hunt, president and CEO of the Consumer Bankers Association, told CNBC on Wednesday.

This kind of "collection of information is routine," though, Yellen said on "Squawk Box." She pointed out that, "right now, on every bank account that earns more than $10 a year in interest, the banks report the interest earned to the IRS. That's part of the information base that includes W-2s and reports on dividends in other income that taxpayers earned."

The only figures that would be reported to the IRS would be the total inflows and outflows for the year, not the size or description of any transaction. The IRS would not have access to details of any particular purchase, she noted: "It is not reporting of individual transactions or anything of the like."

What could happen next

The proposal still has to receive congressional approval in order for the measure to be passed.

The $600 threshold could also be raised significantly. House Ways and Means Committee Chairman Richard Neal has suggested in recent days that Democrats might ultimately raise the reporting threshold for an individual account from $600 to $10,000, Ylan Mui reported for CNBC on Wednesday.

To be clear, the proposal, even if it passes, is "not changing any taxable liability," says Rosenthal. It could increase America's compliance with tax law, though: "If people know they're being monitored, if you're being watched, you abide by the rules better."

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