The Bank Secrecy Act (BSA) requires financial institutions to report to the IRS transactions exceeding $10,000 or multiple transactions in aggregate of $10,000 in a single day related to the same consumer or business. This report is known as a Currency Transaction Report (CTR) and serves multiples purposes. The report assists law enforcement in identifying and detecting potentially suspicious activity, such as money laundering, but also helps the IRS identify and potentially detect income that is not being reported for tax purposes. The CTR is triggered only when cash exceeding $10,000 is involved in a transaction or series of transactions.
In May 2021, as part of the American Families Plan, President Biden proposed that financial institutions should report to the IRS consumer and business account activity exceeding $600 annually. The U.S. Department of the Treasury (Treasury) explained this proposal’s purpose is “to increase the visibility of gross receipts and expenses to the IRS.” Currently, financial institutions are required to provide Form 1099-INT to taxpayers when they earn more than $10 in interest from an account. The expectation is to use this existing form to capture gross inflows and outflows of the activity in business and consumer accounts. Payment settlement entities (PayPal, Venmo, Square, etc.) and cryptocurrency exchanges and custodians also would be required to report gross receipts and purchases.
The increased regulatory burden would be upon financial institutions to reconcile. The Biden administration said it “would concurrently seek out ways to reduce any new burden on financial institutions associated with this information reporting requirement.” The effect of this reporting “is to provide easy access to summary information on financial accounts” and to decrease the likelihood of IRS audits for taxpayers who are currently compliant with reporting of all income, as outlined in the Treasury’s Tax Compliance Agenda. The Treasury also states, “For non-compliant taxpayers, this regime would encourage voluntary compliance as evaders realize that the risk of evasion being detected has risen noticeably.” Payment settlement entities and cryptocurrency exchanges and custodians also would be required to report gross receipts and purchases. These entities were included in the proposal to combat a shift in consumer usage to cryptocurrency and other platforms to disguise transactions related to income generated.
Many financial institutions and trade groups have reacted negatively to this proposal. Specifically, the American Bankers Association, jointly with bankers’ associations from all 50 states and Puerto Rico, submitted a letter to the U.S. Senate Committee on Finance in July 2021. Republican Sen. Mike Crapo of Idaho had introduced an amendment to the budget resolution to prevent this reporting; however, it was rejected in August 2021. If approved, this proposal is expected to be effective for the tax year 2023.
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