The Known Unknowns About The Transaction Reporting Proposal

October 21, 2021 at 11:02 am 1 comment

The more I think about the IRS’s tax proposal, the more I want to channel my inner Donald Rumsfeld. The late secretary of defense famously explained that “There are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns, the ones we don’t know we don’t know.”

In the last couple of days I have started to get calls not only from the usual policy crowd that recognizes the Account Transaction Reporting requirement for the lousy idea it is, but also from the compliance crew that would be responsible for translating the idea into a tangible framework. 

Here is some information about what we know and don’t know about this extremely fluid idea:

Where can I find this legislation?

  • No legislation has actually been introduced. What we are debating is a proposal originally outlined by the Treasury as part of the Administration’s Revenue Proposals (starting on page 88).

When would this proposal take effect?

  • If the Treasury has its way this proposal would take effect for the 2023 tax year.

What exactly is the Treasury proposing?

  • In its own words, the Treasury is proposing a “comprehensive financial account reporting regime” (that doesn’t sound too scary does it?) Financial institutions would play a crucial role in this process. They would be responsible for reporting gross inflows and outflows out of accounts.

What information would financial institutions be required to report to the IRS?

  • In a caustically worded fact sheet released two days ago, the Treasury stressed that financial institutions would not report individual transactions to the IRS. Instead, they would only have to provide a mere “two additional data points”.  These data points would be:
  1. The total amount of funds deposited; and
  2. The total amount of funds withdrawn over a year.

(Gee I can’t imagine why your members would be upset upon learning you have to turn this information over to the IRS.)

How exactly would an account transaction be defined by the Treasury?

  • This one’s going to be tougher to clarify than the Treasury may realize. For example, if I internally transfer money from my savings to a checking account, is that an account transaction? This is a particularly important question for credit unions which still utilize the concept of “master” and “sub” accounts (by the way, this terminology drives me nuts but that can be the subject of another blog).

Are there thresholds below which this report would not be issued?

  • As originally proposed by the Treasury, the plan would not have applied to accounts with $600 or less in transactions. In recent weeks there have been proposals to raise that threshold to $10,000.  But remember this is an aggregate threshold.  Over the course of a year, almost all your members would make transactions that in the aggregate exceed this threshold.  Furthermore, with or without a transaction threshold by Congress, your credit union would be responsible for ensuring that this information is appropriately tracked. At the very least this translates into more time and expense working with your core operating system provider. For smaller credit unions, this mandate will be an extremely labor intensive mandate with which to comply.

Isn’t Congress going to ensure that this only applies to certain members?

  • This is where we really need to see actual language. According to the Treasury’s press release, Congress has modified the proposal to include an exemption for wage and salary earners and federal program beneficiaries. Under this approach “such earners can be completely carved out of the reporting structure.”

This is the type of language which drives compliance people crazy. Among the questions that come to mind are: How exactly are financial institutions supposed to differentiate transactions involving employer wages from other types of legitimate transactions not involving an employer?  For instance, many members derive income from driving Uber or having small businesses.

Entry filed under: Compliance, Economy, econony, Federal Legislation, Regulatory. Tags: , , , .

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1 Comment Add your own

  • 1. Mike Carter  |  October 21, 2021 at 11:09 am

    Fantastic summary Henry! Thank you!

    Reply

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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